Ithaca Lawyer What are New York Graduated Sanctions?

from crimemuseum.com

New York probation departments and the Courts love to throw around fancy terms for pretty basic things. They use plenty of acronyms, like ATI (alternatives to incarceration) or PPI (pre-plea investigation) and everyone is expected to know what they are talking about. See you at the next PTC (pre-trial conference).

Always Ask if You Don't Know or Understand

Number rule when hiring an attorney, talking with an attorney, or dealing with the Court system is:
ask if you don't know, do not assume anything about anything, ask until you are clear about the subject and the answer. I ask about the things I don't know and there is plenty I don't know. I learn new stuff every day. It is smart to ask and dumb to pretend to know.

Fancy Words versus Plain English

Sometimes things sound better when we use colorful language.

Being Incarcerated = Going to jail or prison, being locked up!
Being placed on or in Probation = Being closely monitored and supervised for years!
Getting a CD = Having to meet certain conditions (do stuff) and stay out of trouble (no new arrests)

Striving for the Appropriate

So for today, the purpose of the Court, the Probation department, District Attorney, and the Judges is to gather all the information and facts about a person and a situation and to move towards an APPROPRIATE sentence of punishment.

What is appropriate sentence for the first time DWI offender with no accident and no injuries is NOT appropriate for the second offender or the one with an accident. Leniency for those who deserve it is at the base of this idea of fairness.

This idea or philosophy is called graduated sanctions. A gradual ratcheting up of harsher penalties. They are designed to hopefully teach, assist, train, and to rehabilitate a person from their criminal activity or behavior.

Graduated Sanctions = Gradually Increasing Punishments

Does the system fail some people? yes, but I have also seen people get the help they surely needed, sometimes whether they wanted it or not. Sometimes salvation is painful. It is generally not a fun process to say the least.

The Job of YOUR Attorney

Now the job of your attorney is to bring balance to this process via input. They must actively work to ensure that everyone gets what they need to recommend and to provide an appropriate sentence.

Your Job/employment history, education, family background, drug/alcohol evaluation, treatment, etc. can all help you or hurt you. They must be a filter and a focuser of information.

The Big HOW and WHAT

They can contact probation, they can give information about you, they can guide you to do the right things, and they can advocate to the Court and to the Prosecutor. Everything can potentially count for or against you, HOW it is presented is just as important as WHAT is presented.

Larry Newman, D.C., J.D.

504 North Aurora Street
Ithaca, NY 14850

newman.lawrence@gmail.com

http://www.ithacadwi.com

Sanctions for Attempting to File a Piece of Paper?

The PACER and CM/ECF programs have revolutionized the practice of bankruptcy law. Thanks to PACER, I can download a document filed in almost any district in the country for the low price of $.08 per page (soon to go up to $.10 but still cheap). Thanks to CM/ECF, I can meet a deadline to file a pleading from home at 11:59 p.m.

The purpose of PACER and CM/ECF is to offer greater public access to government records. According to the Administrative Office of the U.S. Courts:

The Case Management/Electronic Case Filing (CM/ECF) system is the Federal Judiciary's comprehensive case management system for all bankruptcy, district and appellate courts. CM/ECF allows courts to accept filings and provide access to filed documents over the Internet.

CM/ECF keeps out-of-pocket expenses low, gives concurrent access to case files by multiple parties, and offers expanded search and reporting capabilities. The system also offers the ability to: immediately update dockets and make them available to users, file pleadings electronically with the court, and download documents and print them directly from the court system.

The Dark Side

While these electronic access programs make the system more transparent, democratic and user-friendly there is also a dark side. Mandatory e-filing can be burdensome on the casual filer, such as a state court practitioner who rarely ventures into bankruptcy court. Many courts have adopted procedures to assist pro se parties and occasional filers. Some examples include allowing paper filing with court permission, allowing documents to be submitted on disk or be scanned at the clerk's office and allowing proofs of claim to be filed without a CM/ECF password and login.

A Scary Order

However, in an extreme case, a court in Pennsylvania has charged an attorney a $150 "processing fee and sanction" for filing a paper document. You can see an image of the order below (I apologize for the poor copy).

In pertinent part, the order states:

(T)he Court has determined that a processing fee and sanction of $150.00 shall be assessed in the event of any failure to comply with the rules concerning electronic filing. The processing fee and sanction shall be paid each time an attorney files a document by means other than the Court's CM/ECF system.

The attorney named below has filed a document on paper, disk or via scanning at the Clerk's office in violation of the Court's long standing procedures in this regard, therefore,

It is hereby ORDERED, ADJUDGED and DECREED that on or before October 7, 2011, Attorney (name redacted) shall pay a $150 processing fee and sanction for failure to electronically file a document with this Court by use of its CM/ECF system. This fee must be paid from the funds of the attorney or his law firm. counsel shall not charge to or collect the $150.00 from the client as a fee, cost, expense. or other charge in this case.

Why It's Bad

This order concerns me for (at least) three reasons. The first is a matter of due process. I have read the local rules of the Bankruptcy Court for the Western District of Pennsylvania. There is no provision for a processing fee or sanction for attempting to file a document other than electronically. Indeed, the Court's procedure manual explicitly states that submitting a document on disk or scanning it at the clerk's office is allowed. Because the order does not distinguish between filing on paper, disk or by scanning at the clerk's office, the order punishes behavior that is expressly allowed by the court's procedures.

Second, I have trouble finding a justification for the order. It is my understanding that individual judges do not have the authority to set fees. While the judicial conference of a circuit may authorize certain miscellaneous fees, I don't think individual judges have this power. I also don't believe that this qualifies as sanctionable conduct. It doesn't fall within Rule 9011 and it is my understanding that the court's inherent authority to sanction is limited to cases of bad faith.

Finally, I have a philosophical objection to the order. One of the stated purposes for the Bankruptcy Code was to break up the incestuous "bankruptcy rings" where local attorneys, trustees and judges had an overly cozy relationship to the exclusion of outsiders. The E-Government Act of 2002 was intended to make government records more accessible. This order violates both of these purposes. It brings the judicial power of the United States down on an attorney who made a procedural mistake. While the amount of the sanction is minimal, it is still a court-imposed sanction which must be reported in some cases. A careful review of the Court's rules and procedures would not have disclosed the peril (although the attorney would have seen that something called e-filing was mandatory). Besides the shock of receiving a judicial reprimand by return mail, the order also sends the message that outsiders practice here at their peril.

Admittedly, bankruptcy is a technical and difficult area of the law. Through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress made it much more challenging for the average practitioner to wander into bankruptcy court representing a consumer debtor. Nonetheless, the courts, as public servants, should use their power to make the courts more accessible rather than less. This order is offensive.

Sloppiness Does Not Equal Vexatiousness or Bad Faith

Dealing with mortgage servicers can be frustrating. Sometimes it is difficult or impossible to get a clean chain of title or a good accounting. In a new opinion by Judge Stacey Jernigan, the Court was faced with a request for fees incurred by a chapter 13 debtor's counsel in dealing with two motions for relief from stay over a three year period, one of which was withdrawn and the other one of which was denied for failure to prove standing. Counsel sought to recover fees based on 28 U.S.C. Sec. 1927 and the court's inherent authority. In a well-reasoned opinion, Judge Jernigan concluded that Rule 9011 was the proper vehicle for seeking fees based on deficient pleadings and that the present case did not rise to the high standard necessary to award fees under Sec. 1927 or the Court's inherent authority. In re Pastran, No. 06-34728 (Bankr. N.D. Tex. 9/20/11). You can find the opinion here.

While the twenty-two page opinion is worth reading in its entirety, I will leave you with the conclusion:

The court is certainly cognizant of the fact that the mortgage servicing industry does not always show itself to be the perfect, well-oiled machine that one would hope it to be. As more and more individuals have gone into default on their home mortgages and resorted to seeking bankruptcy protection, bankruptcy courts have seen certain problems that exist in the home mortgage servicing industry, particularly issues when it comes to chain of title and other documentation. Some of these cases may require bankruptcy courts to take action and issue appropriate orders to ensure that such practices do not continue; however, in this case, the court does not believe it to be a good exercise of discretion to do so.

The court would conclude by stating that Rule 11 seems to be the more appropriate tool to use when requesting sanctions or fee shifting, not only because it allows a party an opportunity to remedy any mistakes it may have made, but also because it seems to make parties engage in a dialogue which could ultimately facilitate settlement. The court found it very enlightening to read Debtor’s Exhibit G, which was a myriad of emails that were exchanged between Debtor’s Counsel and HWALLP over the approximately 3-year period that this matter was pending. From the court’s review of these emails, there was certainly no evidence of inappropriate behavior by HWALLP, AHMSI, or Citi. In fact, the overall tone of the emails was quite professional and courteous. If anything, this case appeared to be one primed for settlement, as there were significant discussions about a possible loan modification. However, settlement and/or a loan modification never happened. Instead, HWALLP filed the Citi Stay Lift Motion and the AHMSI Stay Lift Motions with certain chain of-custody gaps and documentation errors (first no indorsement; then ultimately an indorsement-in-blank supplied but not offered into evidence). While this was sloppy and bad form (which justified denying stay relief), this, in and of itself, did not rise to the level of bad faith or vexatious litigation that would legitimize fee shifting. (emphasis added).

Opinion, pp. 20-22.

3d DCA Watch -- Rules Are Stubborn Things Edition.

Did you realize that standing up, raising your hands and exclaiming "IF YOU KNOW" in a loud, really obvious way after a question is posed to your client at a deposition could somehow be construed as coaching?

What, little 'ole me?  I was just clearing my throat.

But PA attorney Max Kennerly in a fine article here thinks obstructing the deposition any way you can in order to save your client from telling the truth may not be permissible after all:

Federal Rule of Civil Procedure 30(c)(1) is quite clear: “The examination and cross-examination of a deponent proceed as they would at trial under the Federal Rules of Evidence …” If an attorney has an objection to a question, then what they must do is also quite clear under Fed. R. Civ. P. 30(c)(2):

An objection at the time of the examination–whether to evidence, to a party’s conduct, to the officer’s qualifications, to the manner of taking the deposition, or to any other aspect of the deposition–must be noted on the record, but the examination still proceeds; the testimony is taken subject to any objection. An objection must be stated concisely in a nonargumentative and nonsuggestive manner. A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3).

That is to say, the defending attorney is indeed a “potted plant” with only two exceptions: they can raise objections in a concise, nonargumentative and nonsuggestive manner, and they can instruct a deponent not to answer a question when necessary to preserve a privilege or enforce a court order.

Could you imagine how depositions in South Florida would proceed if everyone simply abided by these rules?

(Then again, what fun would that be?)

Speaking of rules, our bunker buddies remind us this week that -- yes, they exist; and yes, you should probably follow them:

Clarke v. Henderson:

For all you fine jurists taking notes at home, here is the correct legal standard for reviewing a motion for judgment on the pleadings:

It is well settled that a Rule 1.140(c) motion for a judgment on the pleadings must be decided wholly on the pleadings—which includes consideration of exhibits attached thereto—and may only be granted if the moving party is clearly entitled to a judgment as a matter of law....In making this determination, all material allegations of the opposing party’s pleadings must be taken as true, and all those of the movants, which have been denied, must be taken as false.

It's that second part you have to watch out for.

940 Lincoln Road v. Hernandez:

This is an unemployment appeals commission appeal in which the employee testified that she was sexually harassed and the employer did not participate:

Employer did not participate in the hearing; consequently, Claimant’s testimony was unrebutted. Nevertheless, the appeals referee concluded that Claimant was disqualified from receipt of benefits because she left voluntarily without good cause attributable to Employer. Apparently, the appeals referee rejected the claim because Claimant did not complain to the police or seek medical or psychological attention as a result of the harassment.

What's that rule on unrebutted testimony again?

Oh yeah:

Uncontroverted testimony which is not illegal, inherently improbable or unreasonable, opposed to common knowledge, or contradictory within itself, should not be disregarded by the trier of facts.

Duly noted!

Kevin Gleason Offers Wine as Peace Offering to Bankruptcy Judge Olson.

So it all comes down to this: an apology and a bottle of wine.

What, no flowers?  No chocolate?

And guess what -- those vituperative responses was all borne from frustration:

B. The Responses Are the Product of Frustration.

14. Attorney Gleason’s responses are the product of frustration due in large part to the
Court’s mistaken conclusion that his client had assented, pursuant to an agreed order, to the turnover of his commission to the plan administrator. The proper method to seek redress in such circumstances is to file an appeal, which Attorney Gleason did. During the pendency of the appeal, which was filed on November 4, 2010, the Court issued the Show Cause Order and later submitted the order for publication with Westlaw. This unfortunate turn of events escalated what was initially perceived as a mere legal conflict into something more personal in nature. The Responses, while intentional, do not reflect a dishonest or selfish motive.

I see -- the old "Westlaw-as-provocation" defense.

In other words, the judge should have kept quiet about the whole thing, but he had to go and blab about it to all our neighbors!

3d DCA Watch -- 57.105 Day!

I'm pretty sure every lawyer loves to threaten another lawyer with section 57.105 sanctions, especially by email or letter.

Nothing is more momentarily satisfying yet ultimately devoid of any real significance whatsoever.

But when you go ahead and serve the motion, then your lasting feelings of superiority and Domineering Overlord Type-A Top Dogness kick in, at least for a day or two until you get a nasty response and a countermotion for fees and sanctions.

Which brings us to today's 3d DCA Watch and a fundamental rule of 57.105, the 21 day safe harbor period.

Who could possibly be unaware of this rule?

On appeal, the City argues that the trial court erred in granting the motion for attorney’s fees and costs because the claimant failed to follow the twenty-one day “safe harbor” provision of subsection 57.105(4). See generally Nathan v. Bates, 998 So. 2d 1178 (Fla. 3d DCA 2008); Burgos v. Burgos, 948 So. 2d 918 (Fla. 4th DCA 2007); O’Daniel v. Bd. of Comm’rs, 916 So. 2d 40 (Fla. 3d DCA 2005). The City points to the undisputed fact that the claimant failed to serve his motion for fees on the City twenty-one days prior to filing the motion with the clerk and presenting it to the trial court. The City also argues that the claimant failed to adhere to the requirements of subsection 57.105(4) by filing its motion on September 11, 2009, one month after the trial court entered the order granting the claimant’s motion for summary judgment. See O’Daniel, 916 So. 2d at 41 (holding that motion for attorney’s fees was untimely under subsection 57.105(4) where motion was served and filed following the conclusion of the trial).

Based on the authority of Davidson v. Ramirez, 970 So. 2d 855 (Fla. 3d DCA 2007), we agree with the City that the trial court erred in granting the claimant’s motion for attorney’s fees and costs.

Come on, the 21 day period wasn't observed, seriously?

Yes, Virginia, this is why we have appellate courts.

One Way to Answer an Order to Show Cause.

Gleason Response

Anyone remember SD FL Bankruptcy Judge John K. Olson?

Well on March 31st he entered an order to show cause against Hollywood bankruptcy attorney Kevin C. Gleason, reported at 2011 WL 1355300 (Bankr.S.D.Fla).

Kevin's response is an interesting read, to say the least.

The opening paragraph is a doozy -- so much for mindfulness...

(It would have made a really great first draft!)

To my loyal tipsters -- what happened at the 4/20 hearing?

Magistrate Judge Goodman Cites Justice Scalia on Civility!

 Sanctions on Admissions
 
I'm beginning to appreciate Magistrate Judge Goodman's orders.

They have a certain directness to them, and his holdings are clearly expressed and supported by both logic and common sense.

This one dealing with sanctions for inaccurate responses to requests for admissions is a good example.

Although I do think there can be circumstances pre-trial where, akin to an sj ruling, a response can be deemed so false or inaccurate as to be sanctionable, for the most part I agree with the Judge's holding that this is reserved under Rule 37 for after trial or an adjudication of the disputed facts.

He throws in a Napoleon reference, also good.

Finally, I was right with the Judge up until the very last part of this quote:

In this spirited litigation, both sides have strongly pressed their positions at every junction and neither side has shown great willingness to make concessions, even on what are usually considered professional courtesies, such as accommodating colleagues’ deadline and scheduling issues. As a general matter, allegations of bad faith against opposing counsel, in addition to being in poor taste, are not helpful in aiding the Court’s adjudication of disputed issues. See ANTONIN SCALIA & BRYAN A. GARNER, MAKING YOUR CASE, THE ART OF PERSUADING JUDGES 34-35 (2008) (“Cultivate a tone of civility, showing that you are not blinded by passion. Don’t accuse opposing counsel of chicanery or bad faith, even if there is some evidence of it. . . . ‘An attack on opposing counsel undercuts the persuasive force of any legal argument. The practice is uncalled for, unpleasant, and ineffective.’”) (quoting Morey L. Sear, Briefing in the United States District Court for the Eastern District of Louisiana, 70 TUL. L. REV. 207, 224 (1995)).

Hold on -- Justice Scalia instructing on civility?

Guess there's a first for everything.

District Court Reverses Sanctions Ruling in Legal Technology Case

A U.S. District Judge found that it was an abuse of discretion for a bankruptcy court to award sanctions against two attorneys and a law firm in a case involving the NewTrak legal technology system. In re Taylor, No. 09-cv-2479-JF (E.D. Pa. 2/18/10). The opinion can be found here. Last year, I wrote a posting about a lengthy opinion by Judge Diane Weiss Sigmund who sought to "”to share my education with participants in the bankruptcy system who may be similarly unfamiliar with the extent that a third party intermediary drives the Chapter 13 process.” While the District Court noted that "the frustrations of the Bankruptcy Court are understandable," it found that the rather creative sanctions imposed by the Bankruptcy Court were not appropriate.

What Happened

The Taylor case involved debtors in a chapter 13 case who got behind on their mortgage payments because of a disputed charge for flood insurance. The creditor firm filed an inaccurate motion which alleged that the debtors had not been making their post-petition payments. The debtor's attorney filed an untimely and inaccurate response indicating that the debtors were making the payments but that they had been refused by the creditor. Upon being presented with proof of payments, the young associate representing the mortgage company insisted on going forward with the motion based upon deemed admissions.

The Bankruptcy Court denied the motion for relief from stay, while noting its displeasure. The following exchange took place.

The Court: I understand the position of local counsel to, you know--I understand. But you can pass it up the line that I was not pleased with this motion for relief.

Mr. Fitzgibbon: Thank you, your Honor.

The Court: And--and--and so that they'd better act in good faith because I'm cutting them a break this time. Because I really find this motion to be in questionable good faith.

District Court Opinion, p. 3, n. 1.

However, at the next hearing, which was on the Debtor's Objection to Claim, the young associate told the court that he had requested a payment history by opening an inquiry with the NewTrak system, but that he had not received a response from his client. He also indicated that he was not permitted to contact the client directly.

As a result of this hearing, the Bankruptcy Court issued an order for the creditor and its attorneys to appear for a hearing the purpose of which is "twofold: (1) to address the Objection to HSBC's claim and (2) to investigate the practices employed in this case by HSBC and its attorneys and agents and consider whether sanctions should issue against HSBC, its attorneys and agents."

After conducting several days of hearings, the Bankruptcy Court made the following rulings:

1. The young associate was not sanctioned despite pressing a motion based on deemed admissions which he knew were incorrect because "I suspect that he has learned all that he needs to learn without protracting this unfortunate time in his nascent career."

2. The head of the bankruptcy section of the firm was sanctioned because "she failed to observe her duty to make reasonable inquiry of the two documents she signed." She was ordered to take additional continuing legal education courses in ethics.

3. The head of the firm (who had not signed any pleadings or appeared at any of the hearings in question) was sanctioned because he "sets the tone and establishes [the firm's] culture." He was ordered to obtain training in how the NewTrak system worked and conduct a training session for all firm members.

4. HSBC, the creditor, was ordered to send a copy of the Bankruptcy Court's opinion to all of its attorneys.

While the actual sanctions assessed were mild, the rebuke from the Bankruptcy Court carried quite a sting. The Udren firm and its two sanctioned attorneys brought an appeal to the U.S. District Court. The U.S. Trustee's Office defended the appeal.

The District Court's Ruling

The District Court reversed the sanctions award.

The Bankruptcy Court imposed sanctions pursuant to Federal Rule of Bankruptcy Procedure 9011, the counterpart of Federal Rule of Civil Procedure 11. The decision is reviewed under the abuse of discretion standard. (citation omitted). After a careful review of the record, I am constrained to hold that it was an abuse of discretion for the Bankruptcy Court to impose sanctions on the appellants here.

The frustrations of the Bankruptcy Court are understandable; delays caused by a lack of accurate information are unfair to debtors, to creditors, and to the courts. However,I am persuaded that the sanctions were inappropriate in this case, for two reasons: First, because the conduct of the debtors’ counsel was at least equally responsible for the difficulties in resolving the status of the mortgage payments, and second, because the record leaves the indelible impression that the appellants were sanctioned less for their specific failings than for the Bankruptcy Court’s desire to “send a message” regarding systemic problems in the litigation of bankruptcy cases and the reliance on computer databases in mortgage disputes.

The actions of the debtors’ counsel materially contributed to the difficulties in resolving the status of the Taylors’ mortgage. In an order relating to counsel fees, the Bankruptcy Court held that the debtors’ counsel provided legal services that “were below the level of competency required to handle this Chapter 13 case effectively.” Order of April 15, 2009 (Document No. 195). Although the errors of the debtors’ counsel do not relieve the appellants of their duty to comply with Rule 9011, they are relevant to a finding of sanctionable conduct. Had the debtors’ counsel responded to the requests for admissions, or submitted a timely request for a complete accounting, the appellants would have been on notice of the payment disputes and the delays may have been minimized or avoided.

Given the overall posture of this case, I cannot agree that the conduct of the appellants was sanctionable in its own right. As noted above, the Bankruptcy Court had determined at the May 1, 2008 hearing that sanctions would not be imposed based
on the Stay Motion. Only Mr. Fitzgibbon (who was not sanctioned)appeared in court for the later hearing. After a close reading of the transcript of the hearings, I am persuaded that the Bankruptcy Court objected to general practices in bankruptcy
mortgage disputes, rather than the specific conduct of the appellants. By way of example, the Bankruptcy Court stated in the hearings that:

"I do not have any adverse views about Mr. Fitzgibbon. You know, this is not about Mr. Fitzgibbon. This is about when attorneys stand up in this Court and they’ve been asked to provide loan histories and they can’t get it. And it’s not just – if it was one young attorney who was having a problem that would be one thing. We wouldn’t have done all this if it was one young attorney who didn’t know that he could do this. But I have attorneys that stand here week after week and can’t get loan histories. I’ve just sat through an hour and a half of this system which is telling me that they should be able to get it not in thirty days, which is the time your attorneys always ask for, but they should be able to get it the next day."

N.T. Oct. 23, 2008 at 107-08 (emphasis added). There is nothing in the record to support a finding that any of the other attorneys referenced are from the Udren firm; to the contrary, the system used by many law firms representing many mortgage holders in bankruptcy cases appears to be at fault. As the Bankruptcy Court stated, “[t]he bottom line from my perspective is that I just want to know when a lawyer stands up in court and says, I want to continue this, I can’t get a document. I want to know why. I want to be able to move these cases.” N.T. Oct. 23, 2008 at 148.

Understandably, something needs to be done when the bankruptcy courts cannot obtain timely and accurate information. According to the Bankruptcy Court’s opinion, the problem of inaccurate mortgage payment information is less likely to arise in the United States Bankruptcy Court for the District of New Jersey because the local rules of that court require that the client certify the truth and accuracy of the averments. Opinion at n.21. Clarity in the rules would benefit all counsel and litigants.

The sanctions imposed in this case were an abuse of discretion, as the Bankruptcy Court already had determined that the Stay Motion did not merit sanctions, and Mr. Fitzgibbon’s failure to obtain the accounting (the only event after the denial of the Stay Motion) was an insufficient basis for the imposition of sanctions against the appellants.

District Court Opinion, pp. 5-9.

What It Means

The Bankruptcy Court's opinion was an example of what could be called inquisitorial justice. The Bankruptcy Court observed what it perceived to be an abuse and conducted an investigation under the guise of awarding sanctions under Rule 9011. However, as the District Court opinion points out, Rule 9011 does not provide a good vehicle for addressing systemic problems.

The Bankruptcy Court's opinion was blogworthy because it was a searching inquiry into the relationship between professionalism and technology. However, the District Court opinion points out that there are technical elements which must be met in order to proceed under Rule 9011. Rule 9011(b) requires that there be a paper which is presented to the court "whether by signing, filing, submitting or later advocating." Thus, it would never have been possible to sanction the head of the firm for setting the tone and establishing the firm culture. Rule 9011 just doesn't get there.

The reversal of the sanction against the head of the bankruptcy section is more problematic. In that case, the Bankruptcy Court granted sanctions for failure to perform an adequate pre-filing investigation. The District Court's ruling is largely non-responsive to this issue. For example, the argument that Debtor's counsel contributed to the problem, while accurate, does not address the review which took place prior to filing the pleadings. However, the District Court may have concluded that when the bankruptcy court initially announced that it was "cutting them a break" on the motion for relief from stay, that it could not go back later and award sanctions.

The important point to take away from the District Court opinion is that sanctions awards under Rule 9011 must flow from the specific conduct identified in the rule. While the Court may also award sanctions under Sec. 105 or its inherent powers, these remedies have their own requirements which must be observed.

Hat tip to Jonathan Bart who sent me the opinion.

Pennsylvania Judge Writes Epic Opinion on Technology and Professional Responsibility

Technology has dramatically changed the practice of law. Thanks to Westlaw and Lexis, it is no longer necessary to keep large expensive libraries. PACER and ECF have made court filings and filing documents available 24/7. I recently observed a case where the parties used GoToMeeting to handle thousands of pages of exhibits electronically. All of these developments have made the practice of law more efficient. However, a recent opinion from Judge Diane Weiss Sigmund highlights that professionals must be masters of the technology rather than being mastered by it. In re Taylor, No. 07-15385 (Bankr. E.D. Pa. 4/15/09).

The Taylor case started with a simple question that comes up frequently in consumer bankruptcy cases: Why couldn’t the creditor’s lawyer get a payment history? The answer given to this question prompted Judge Sigmund to launch a one year investigation into the technology behind the case and how it was being used and to award some very creative sanctions. The Judge authored a 58 page opinion ”to share my education with participants in the bankruptcy system who may be similarly unfamiliar with the extent that a third party intermediary drives the Chapter 13 process.” Opinion, p. 30.

What Happened

Taylor involved a chapter 13 filing to try to keep a house. Two firms appeared on behalf of HSBC, the mortgage holder. A national firm filed a proof of claim, while a local firm filed a motion for relief from stay and responded to an objection to claim. All three documents were defective. The proof of claim attached the wrong mortgage and listed the wrong payment amount. The motion for relief from stay recited that the debtors had failed to make their post-petition payments for three months, when in fact they had been making the payments, but at a lower amount due to a dispute over flood insurance. According to the Court, “at the time the Stay Motion was filed, the Debtors were short $360 for payments more than 60-days overdue, a fact not clear from the canned pleading prepared by a paralegal from New Trak screens. The Debtors were charged $800 for the cost of the motion.” Opinion, p. 14. The motion also recited that the debtors had no equity in the property which the attorney later attributed to being part of a boilerplate form. The response to the objection to claim said that the claim was just fine when it was not.

The Debtor’s attorney did not do much better. She filed a late response, which incorrectly stated that the debtors had made all of their payments but they had been returned by HSBC. The Debtor’s attorney also failed to respond to requests for admission tendered with the motion, incorrectly believing that her response to the motion was sufficient.

Upon receiving the Debtor’s attorney’s response, HSBC’s local counsel continued the hearing for further investigation. The Debtor’s lawyer then filed an amended response, which included copies of the checks for the months of September through January with both front and back and the checks for February and March with just the front. The amended response alleged that the payments for September through March had all been made. As it turns out, the reason that there were only copies of the front side of the February and March payments was because the Debtor’s counsel was still in possession of these checks which had not yet been tendered. Debtor’s counsel erroneously mailed these checks to the person at HSBC’s attorney’s office who handled Sheriff’s Sales rather than to the Bankruptcy Department. The person in the Sheriff’s Sale department sat on the checks and did not inform the Bankruptcy Department that they had been received. The Debtor’s counsel also requested a payment history.

On May 1, a young associate appeared for HSBC and insisted on prosecuting the motion even though he had been provided with proof of payments. The young attorney sought to proceed based on the deemed admissions even though he knew they were not accurate. The court denied the motion and instructed the debtor to escrow the disputed flood insurance premiums while the parties worked through the issue.

One month later, the parties appeared on the claims objection and things rapidly escalated. The young associate (he had been licensed a few months at the time) stated that he could not get a payment history from his client. He explained that he had submitted a request for a payment history through an electronic system, but that he was forbidden to speak directly with the client. This statement caused the Court to issue a show cause order.

In response to the Court’s Show Cause Order, HSBC retained new counsel and the problem with the claim was quickly settled. As noted by the Court, “What could not be accomplished for six months through the use of electronic communication was finalized in an hour the old way, by people sitting down with all relevant information and talking to each other.” Opinion, p. 19.

While the contested matters were quickly settled, the Court was not satisfied. It launched an inquiry which brought the technology center stage.

The Technology and Professional Responsibility

The technology involved was the NewTrak system developed and operated by Lender Processing Services, Inc. f/k/a Fidelity Information Services, Inc. To its credit, LPS was “extremely cooperative” with the court’s inquiry and “provided a detailed demonstration of how NewTrak works in a hypothetical case.” Opinion, p. 9, n. 15. As a result, the Court had a substantial knowledge base to draw on when writing her opinion. NewTrak is an automation system which allows lenders and attorneys to communicate with each other. The lender uploads its information onto the system which then generates a referral to an attorney on the approved list. The attorney receives the information and generates the proof of claim, motion for relief from automatic stay or other pleading. The system also allows the attorney to request information from the client by opening an issue on the system. Another system called the mortgage servicing platform handles routine mortgage servicing. According to LPS, it was used by 39 of the 50 largest banks in 2007 and processed approximately 50% of the loans in the United States.

While NewTrak provides a flow of information between attorney and client, it is not meant to prohibit direct contact between the parties. The Default Services Agreement specifically provides that “The Firm will never be prohibited from directly contacting any client where, in the professional opinion of the Firm such contact is necessary.” Opinion, p. 34, n. 45. As a result, the agreement contemplates that the Firm will exercise professional judgment. However, the Court found that when an attorney mechanically uses the system “the attorney abandons any pretense of independent judgment to the greater goal of expeditious and economical client service.” Opinion, p. 31.

The Court contrasted the benefits of using the technology with its pitfalls when a matter is not routine.

It is a regrettable reality, especially in this economic climate, that many homeowners are defaulting on their mortgages. While bankruptcy affords an opportunity to save the family home through a Chapter 13 plan that stretches the payments of mortgage arrears, it also requires debtors to maintain current payment on their mortgages. (citation omitted). This obligation is beyond the capability of many debtors who use a bankruptcy to forestall the inevitable. It seems reasonable that a mortgage lender should be able to avail itself of economic and expeditious means of collecting defaulted loans through the use of technology and delegation of tasks to lower cost labor. In many cases, the motions are granted by default, the debtors, or often more accurately their attorneys, filing no answer or making no appearance, where there is simply no defense to the relief sought. However, where, as here, the debtor contests the relief sought, the flaws in the automated process become apparent. At this juncture, an attorney must cease processing files and act like a lawyer. That means she must become personally engaged, conferring with the client directly and abandoning her reliance on computer screens as an expression of her client’s will. This did not happen in this case until the Court became involved. It should not have taken judicial intervention to bring the Claim Objection to its conclusion.

Opinion, p. 32 (emphasis added).

In this case, the court found that professional judgment was not used.
The attorney for the national firm which filed the proof of claim testified that he reviewed only a representative sample of 10% of the claims which were electronically signed with his name. He did not review the specific claim in this case and as a result, did not find the mistakes in it.

The president of the local firm which utilized NewTrak testified that he delegated the administrative aspects of the firm’s practice and was unaware of how NewTrak worked.

The head of the bankruptcy section of the firm electronically signed all of the pleadings in the matter, but delegated all of the court appearances to an attorney who had been licensed for only one month when the initial pleading was filed. The court found that the head of the bankruptcy section failed to supervise the young attorney and asked the rhetorical question, “Could it be with ten lawyers and 130 paralegals and processors, a young attorney is expected to figure it out himself?” Opinion, p. 42.

The Court also found that the client had restricted the firm’s authority.

The Udren Firm’s authority from HSBC allowed them to take only three actions: (1) seek a continuance; (2) settle with Motion with an agreement for a six month maximum cure of the mortgage arrears with an agreement for stay relief upon certification of default of any future payment; and failing either of the foregoing; (3) press the motion. (citation omitted). No consultation with HSBC was expected nor occurred during the pendency of the contested matter.

Opinion, p. 37, n. 49.

Sanctions

The Court found that several parties to the case had violated their obligations under Rule 9011, including the obligation to make reasonable inquiry. However, the Court was also mindful that sanctions should be “limited to what is sufficient to deter a repetition of such conduct or comparable conduct by others similarly situated.” Rule 9011(c)(2). As a result, the Court granted some very creative relief.

As to the Udren Firm, which acted as local counsel, the Court found that the expense of having to hire counsel and defend itself and the productive time lost in attending to the matter was punishment enough. However, the Court devoted additional attention to the specific lawyers from the firm.

The Court found that the head of the Udren Firm’s bankruptcy section “may be so enmeshed in the assembly line of managing the bankruptcy department’s volume mortgage practice that she has lost sight of her duty to the court and has compromised her ethical obligations.” Opinion, p. 52. The Court ordered her to obtain 3 credits of CLE in professional responsibility/ethics in addition to her regular requirements.

The court declined to award sanctions against the young associate, finding that “I believe these proceedings have been very hard on this young lawyer and while lack of experience is not a defense to a Rule 9011 violation, I suspect that he has learned all that he needs to learn without protracting this unfortunate time in his nascent career.” Opinion, p. 52.

The Court found that the head of the firm “sets the tone and establishes its culture. He notes his firm’s reliance on NewTrak and other such aids as essential to the economic structure of the law practice. However, he had little familiarity with the actual operation of NewTrak and did not appear to get involved in the ‘weeds’ of the bankruptcy practice.” Opinion, pp. 52-53. The Court found this lack of involvement to be troubling and ordered relief accordingly.

Mr. Udren may not be aware of the questionable practices imposed by his firm’s acquiescence to NewTrak and how little legal judgment is employed as a result or he may be aware and find it acceptable. To examine these practices in light of extant ethical obligations, I will direct him to obtain training in NewTrak and spend a day observing his bankruptcy attorneys, paralegals, managers and processors as they handle referrals. Since policy emanates from the top, I will also order Udren and (the head of the bankruptcy section) to conduct a training session for all members of the bankruptcy department in the appropriate use of the escalation procedure and the requirements of Rule 9011 with respect to pre-filing due diligence.

Opinion, p. 53.

The Court did not award sanctions against the national firm which prepared the proof of claim, but not because she found their conduct appropriate. The Court found that the record had not been fully developed with regard to this party, that the practices were national in scope and that the U.S. Trustee was investigating the firm. As a result, the Court left it to another day and another court to address these issues.

The Court found that some of the problems in the case resulted from the Udren firm's reluctance to contact its client directly and found that other firms used by HSBC might be under the same impression. As a result, the Court ordered HSBC “to prepare and transmit by mail and e-mail a letter to all the Network Firms outlining the escalation policy and encourage its use consistent with the Rules of Professional Conduct. HSBC should also advise the Network Firms that use of direct contact will not reflect adversely on the firm.” Opinion, p. 55.

The Court did not sanction LPS.

Based on the record, I find that sactions against LPS are not warranted. While it does appear from the limited screens that have been introduced in this case, that LPS’ involvement goes beyond passing data through their automatic system, I cannot conclude that it imposed restrictions on the Udren Firm’s handling of this case. (citation omitted). The Udren Firm entered into a contract with Fidelity which it viewed as advantageous to the business relationships with its mortgage lender clients and presumably its bottom line. As attorneys, the Udren Firm understood an attorney’s obligations under Rule 9011 to investigate and took a lesser approach. While NewTrak prescribed that approach, LPS did not dictate how they would handle cases referred to them when problems with the procedure were apparent. By misusing the resources made available to them, the Udren Firm, not LPS, was responsible for the Rule 9011 deficiencies in this case.

Opinion, pp. 55-56.

Conclusion

Judge Sigmund’s remarkable opinion demonstrates that she is no Luddite. Her opinion focuses on the need to exercise professional judgment in conjunction with technology rather than mindlessly bashing the technology itself. In her conclusion, she stated:

My research has disclosed no other published opinion that explains the NewTrak process that is utilized by so many consumer mortgage lenders seeking relief in bankruptcy cases. I have attempted to share my education in this Opinion. Finally, it is my hope that by bringing the NewTrak process to the light of day in a published opinion, system changes will be made by the attorneys and lenders who employ the system or at least help courts formulate the right questions when they have not. While NewTrak has many features that make a volume business process more efficient, the users may not abandon their responsibility for fairness and accuracy to the seduction of electronic communication. The escalation procedures in place at HSBC and the Udren Firm existed on paper only. When an attorney appears in a matter, it is assumed he or she brings not only substantive knowledge of the law but judgment. The competition for business cannot be an impediment to the use of these capabilities. The attorney, as opposed to a processor, knows when a contest does not fit the cookie cutter forms employed by paralegals. At that juncture, the use of technology and automated queries must yield to hand-carried justice. The client must be advised, questioned and consulted. Young lawyers must be trained to make those judgments as opposed to merely following the form manual. Until they are capable of doing so they should be supported and not left to sink or swim alone in an effort for the firm to be more profitable by leveraging the cheapest labor.

At issue in these cases are the homes of poor and unfortunate debtors, more and more of whom are threatened with foreclosure due to the historic job loss and housing crisis in this country. Congress, in its wisdom, has fashioned a bankruptcy law which balances the rights and duties of debtors and creditors. Chapter 13 is a rehabilitative process with a goal of saving the family home. The thoughtless mechanical employment of computer-driven models and communications to inexpensively traverse the path to foreclosure offends the integrity of our American bankruptcy system. It is for those involved in the process to step back and assess how they can fulfill their professional obligations and responsibly reap the benefits of technology. Nothing less should be tolerated.

Opinion, pp. 57-58 (emphasis added).

Sign Costs Creditor $21,800

Chuck Newton's blog, stayviolation.com, has the details on a case he recently tried in which a creditor posted a sign in a small town stating: "BRAD COLLIER OWES ME $984.23 WILL YOU PLEASE COME AND PAY ME!" The Court awarded $21,820.00 in damages for violation of the automatic stay. No. 08-2004, James Bradley Collier v. Paul Hill (Bankr. E.D. Tex. 4/7/09). Go to Posting Signs About the Debtor Can Constitute A Stay Violation on Chuck's Blog for all the details.

Fifth Circuit Reinstates Sanctions Award

The case of a Houston attorney sanctioned based on a brief representation of a debtor in 2001 took another turn as the Fifth Circuit reinstated the judgment of the Bankruptcy Court awarding sanctions. Matter of Cochener, No. 08-20048, 2008 WL 4681579 (5th Cir. 10/23/08). I have previously written about this case in "Brief Representation Comes Back to Haunt Attorney Six Years Later" (5/7/07) and "Sanctioned Lawyer Wins Reprieve From District Court; Court Clarifies Standards for Non-9011 Sanctions" (3/21/08).

Since I have discussed the facts extensively before, I will just summarize them briefly here. In 2001, an attorney without much bankruptcy experience filed chapter 7 for a woman who claimed few assets and no income. When questions were raised about the accuracy of her schedules at the first meeting of creditors, he decided to bring in a more experienced attorney. The new attorney realized that the debtor was heading for trouble based on incomplete schedules and statements and undisclosed transfers. He filed a motion to dismiss the case under Sec. 305(a)(1), claiming that it would be in the best interest of creditors and the debtor. He also apparently advised the debtor not to show up for the continued meeting of creditors and not to produce documents which the prior counsel had already agreed to produce. He also sent the trustee a letter in which he objected to producing documents about transfers going back more than a year on the basis that Sec. 548 only allowed a one-year look back period. Eventually he requested permission to withdraw because he had lost contact with the client. The court allowed the attorney to withdraw with the proviso that the trustee would be allowed to seek sanctions. The trustee finally got around to requesting sanctions years later.

The Bankruptcy Court awarded sanctions totaling $25,121.89 consisting of disgorgement of the $2,500.00 fee paid to the attorney and $22,621.89 to compensate the trustee for attorney's fees spent opposing the motion to dismiss and in obtaining sanctions. The sanctions were awarded under Sec. 105 and 28 U.S.C. Sec. 1927 for the reason that the trustee had not complied with the procedural requirements under Rule 9011.

The District Court affirmed the disgorgement order, but reversed the attorney's fees. The District Court concluded that to award sanctions under Sec. 105 and Sec. 1927, bad faith must be present. The District Court reviewed the various actions taken by the attorney and concluded that the only action which was sanctionable was advising the debtor not to attend the continued creditors meeting and produce documents. The court found that an attorney who advised a client not to attend the creditors' meeting had not earned his fee. Thus, the court affirmed disgorgement of the fee. The court found that only the minimum amount of sanctions necessary to deter bad conduct should be awarded and reversed the remainder of the Bankruptcy Court's award.

The Fifth Circuit concluded that the parties did not disagree on the underlying facts and that the real dispute was about the inferences to be drawn from those facts. The Fifth Circuit took a deferential approach toward the Bankruptcy Court's conclusions. It stated:

Viewing the case from the bankruptcy court's perspective, whether or not we might have drawn different inferences, we ascertain plausible record evidence to support the bankruptcy court's findings that Barry acted in bad faith, especially when he asserted that dismissal of Ms. Cochener's case was in the best interest of creditors; when he determined that he would not attend the rescheduled meeting of creditors on June 20, 2001; when he instructed the Debtor not to turn over relevant documents to the Trustee; and when he knowingly misrepresented the reach-back period for evaluation of improper transfers by the Debtor. . . . The district court's critical error seems to have been is failure to recognize that even if the bankruptcy was commenced originally as a "two-party dispute" and even if such a case might ordinarily be dismissible, the debtor has no right to such relief when she has abused the privilege afforded by bankruptcy relief. . . . The bankruptcy court acted well within its authority to enforce the integrity of the process by policing the accuracy of the debtor's schedules and representations to the court.

There are two issues worth noting here. The first relates to appellate review and the second relates to the attorney's duty to the court and his client.

On an appeal of a bankruptcy court's order, factual findings must be sustained unless clearly erroneous and legal conclusions are reviewed de novo. The question here was whether the conclusion of "bad faith" was more closely a factual finding or a legal conclusion. The Fifth Circuit found that the Bankruptcy Court's "inference" that debtor's counsel had acted in bad faith had to be upheld so long as it was "plausible." The District Court, on the other hand, appeared to make an independent determination of the conclusion to be applied to the facts. Although the Fifth Circuit did not go into much detail on this point, the result seems to be that conclusions to be drawn from the facts are reviewed much like the underlying facts themselves.

The ethical issue here concerns how the attorney managed his competing duties to his client and the court. It arguably was in the best interest of the client to extricate herself from bankruptcy before her fraudulent transfers could be uncovered. An attorney who advised his client not to file bankruptcy because of the possibility that fraudulent transfers would be uncovered would be acting ethically and giving the client good advice. However, once a bankruptcy proceeding had been filed, the attorney's duty to pursue the client's interest was limited by the attorney's duty of candor to the court. While the attorney was probably more disingenuous than dishonest, the perception that the attorney had moved from being an advocate for the client to a facilitator of the client's actions proved to be costly.

Fifth Circuit Answers Three Questions of First Impression on Violation of Automatic Stay

The Fifth Circuit answered at least three questions of first impression in a recent case regarding violation of the automatic stay. In re Repine, No. 06-20807 (5th Cir. 7/22/08).

The facts of this case sound straight out of a made for TV movie, including love gone bad, prison and a renegade lawyer. Ronald Repine was married to Elizabeth Pollard Repine. Although he had made as much as $147,000 per year at one point, he was unemployed during part of the period from 2001 to 2003. He managed to get behind on his child support to the extent of $22,859. The family court sentenced him to 180 days in jail for criminal contempt and also ordered that he be held in civil contempt indefinitely until he paid the past due support and paid $2,027 to his ex-wife’s attorney Patsy Young.

Shortly after being incarcerated, Ronald did what anyone would do: he filed for chapter 13 bankruptcy. Elizabeth then retained separate counsel to represent her in the bankruptcy. Notwithstanding the automatic stay, Elizabeth made a deal with Ronald to pay the back support and get him out of jail. Ronald agreed to deed his house to Elizabeth who would be allowed to sell it and apply the proceeds to the back child support. There was just one problem: the agreement did not provide for payment of Patsy’s attorney’s fees. Elizabeth’s bankruptcy lawyer came up with a practical solution. He obtained an order from the Bankruptcy Court allowing the transfer of the house to Elizabeth and for the proceeds to be applied to the child support debt, including attorney’s fees. The order also provided that any unpaid attorney’s fees would be paid under Ronald’s Chapter 13 plan.

Elizabeth complied with her part of the deal and asked that Ronald be released from jail. However, Patsy objected because she wanted to be paid her attorney’s fees. As a result, the family court denied the motion. Shortly thereafter, Ronald completed the criminal portion of his contempt sanction and started serving the civil contempt portion. Patsy refused to submit an agreed order for Ronald’s release unless she received certified checks for her attorney’s fees. Elizabeth and Ronald then went to Bankruptcy Court to enforce the agreed order. The Bankruptcy Court ordered Patsy to appear and show cause why she should not be held in contempt for violation of the automatic stay. Despite being served with the order by a U.S. Marshall, Patsy did not appear. As a result, the Bankruptcy Court caused a warrant to be issued and Patsy was taken into custody by the U.S. Marshall’s Service.

The Bankruptcy Court ordered Patsy released but told her to stop trying to collect her attorney’s fees. Undeterred, Patsy refused to submit the order providing for Ronald’s release. Because of Patsy’s actions, Ronald was unable to attend his father’s funeral. Finally, Patsy moved to withdraw from the family law case and Elizabeth’s bankruptcy counsel substituted in. Ronald was finally released after having served about six weeks of his civil contempt sentence.

Once he got out, Ronald filed a complaint for violation of the automatic stay against Patsy. The Bankruptcy Court awarded Ronald total damages of $27,280, including $4,400 for emotional distress and $5,000 in punitive damages plus $33,720. Thus, Patsy’s efforts to collect $2,027 in attorney’s fees caused her to incur liability of $61,000.

The Court of Appeals did not have any difficulty finding that the Bankruptcy Court’s determination that Patsy had violated the automatic stay should be affirmed. While child support may be collected from property which is not property of the estate, Patsy’s demand to be paid or else Ronald could not be released from jail did not distinguish between being paid from property of the estate or non-property of the estate. Patsy just wanted to get paid and she didn’t care where the money came from. Additionally, the Court of Appeals found that Patsy’s determined refusal to submit the order agreed to by her client extended the period of Ronald’s incarceration.

When it came to damages, the Fifth Circuit plowed new ground. Section 362(k) allows punitive damages in “appropriate circumstances,” a rather indefinite mandate. The Fifth Circuit had not previously decided what constituted “appropriate circumstances” to award punitive damages. It accepted the Eighth Circuit’s standard of “egregious intentional misconduct on the violator’s part” and found that Patsy met the standard. Ignoring the Bankruptcy Court's admonition to stop collecting as well as your own client’s wishes is enough to constitute egregious intentional misconduct.

Next, the Fifth Circuit had to consider whether damages for emotional distress could be awarded for a violation of the automatic stay. This was also an issue of first impression. The Court found that a debtor seeking to recover damages for emotional distress must set forth “specific information” rather than “generalized assertions.” The Court found that testimony that he was “very upset” at what his sons would think about him being incarcerated, that it was “very traumatic” to miss his father’s funeral and that he had dreams about missing his father’s funeral and worried about it when interacting with other people all fell within the category of “generalized assertions” which would not give rise to emotional distress. As a result, the Court vacated the award for emotional distress.

Finally, the Fifth Circuit considered whether fees incurred in prosecuting an action for violation of the automatic stay were recoverable as damages. This was also an issue of first impression. The Fifth Circuit agreed that fees incurred in prosecuting an action for violation of the stay were recoverable and rejected a requirement that there be proof that the fees incurred had actually been paid.

At the end of the day, all of the damages except for $4,400 in emotional distress were affirmed.

Judge Rejects Defense of The Computer Made Me Do It

A volume creditors' practice is facing sanctions after the court rejected its explanation that faulty computer coding caused it to file erroneous pleadings. The opinion illustrates the tension between the requirements of Rule 9011 and the need to rely on automation in a volume practice. While the final sanctions to be awarded have not yet been decided, the court in this case was clearly exasperated.

The Plan and the Original Objection

A debtor filed chapter 13 and included a debt with respect to a property he was leasing to his brother. The debtor's schedules plainly stated that the property was NOT the debtor's principal residence. The debtor's counsel also claimed to have informed the lender's counsel of this fact prior to bankruptcy.

The debtor proposed a plan which sought to pay the lender the value of its collateral plus interest through the plan. The payments to be made to the lender under the plan exceeded the amount of the rents being received by the debtor. The creditor filed a proof of claim in which it adopted the debtor's valuation of the property.

The lender's attorney filed an objection to confirmation which the court characterized as "grossly erroneous, and to anyone familiar with bankruptcy law, the objection is clearly legal nonsense." Among other things, the objection claimed that:

* The debtor's attorney, rather than the debtor had executed the note;
* That the plan did not pay the arrearages in full (despite the fact that the plan proposed a cram-down rather than a cure of arrearages);
* That the plan impermissibly modified a loan on a principal residence;
* That the lender's administrative claim was deferred over 36 months (despite the fact that the lender did not have an administrative claim); and
* That the plan impermissibly proposed to pay interest on the lender's non-dischargeable unsecured claim (despite the fact that the lender did not have a non-dischargeable claim).

The Debtor responded and pointed out the errors in the objection.

The First Hearing

At the first hearing on confirmation on October 3, local counsel for the lender argued that the plan impermissibly modified a loan on a principal residence. When the debtor responded that the property was not the debtor's principal residence, "local counsel replied that he had been instructed by (the lender's counsel) to ask for a continuance if Debtor made that contention."

This choice of tactics was not good. As the court later found, the objection relating to the principal residence violated Rule 9011 because the lender had no evidence that the debtor's statements were wrong. However, it got worse.

"As clear as that violation as, it is even more egregious that Countrywide continued to advocate that position in open court on October 3, notwithstanding Debtor's written response on September 28. Countrywide obviously had considered Debtor's response, knew that the argument had no validity, and was prepared to abandon the argument by asking for a continuance to implement 'Plan B,' which apparently had not yet been devised. . . . (T)he court believes that the request for a continuance was not made in good faith but was intended simply for delay."

Of course, the Court had not made these findings yet on October 3. However, the court did warn the lender's counsel that it should scrutinize its position in light of Rule 9011.

The Lender Withdraws Its Objection But "Discovers" A New One

After the hearing, Debtor's counsel sent the lender's counsel a letter demanding that the lender cure the violation of Rule 9011. In response, the lender filed a withdrawal of its objection. Unfortunately, this pleading violated Rule 9011 as well. The withdrawal stated that the lender was withdrawing its objection because the Debtor had filed an amended plan which proposed to cure the arrearage. Of course, this was just plain wrong. The Debtor had not filed an amended plan and was still seeking to cram-down the value on the rental property.

To further complicate matters, just four business days prior to the re-scheduled hearing, the lender filed a new objection which asserted that it just "discovered" that it held an absolute assignment of rents and that because the rents belonged to Countrywide, the Debtor could not use them in the plan. The absolute assignment of rents theory used to be a standard weapon used by lenders in single asset real estate cases during the 1980s and caused a lot of controversy at that time. However, the theory had major practical difficulties (such as how the rents could be conveyed to the lender without reducing the debt) and has not been seriously advocated for many years.

The First Opinion

At the continued hearing on November 14, lender's counsel abandoned all of its original objections and argued the absolute assignment of rents. Debtor's counsel objected that she had been sand-bagged. This was a legitimate complaint because the local rules required any objections to be filed five business days before confirmation. As a result, the court continued the hearing once again. However, at this point, the court's displeasure took written form. On November 28, the Court wrote the first of three written opinions in the case. Case No. 06-60121, In re James Patrick Allen (Bankr. S.D. Tex. 11/28/06)(Order for Memoranda and for Rule 7016 Conference And Order for Hearing on Sanctions Under Rule 9011). In this opinion, the court required the parties to brief the absolute assignment of rents issue and to advise the court as to the witnesses and exhibits they planned to introduce. The court also stated that it appeared that the lender's counsel had violated Rule 9011. The court required both local counsel and lender's primary counsel to attend the hearing.

The Second Opinion

After the pre-trial conference on the absolute assignment of rents issue, the court concluded that there were not any disputed issues of fact. The court wrote its second opinion which concluded that the assignment of rents was intended for purposes of security rather than as an absolute assignment. No. 06-60121, In re James Patrick Allen (Bankr. S.D. Tex. 12/20/06)(Memorandum Opinion Findings of Fact and Conclusions of Law Concerning Order Denying Motion for Turnover & Accounting And Concerning Confirmation of Chapter 13 Plan). As a result, the court confirmed the plan. The court reserved the issue of sanctions for a subsequent opinion.

The Third Opinion

After all of this prologue, the court finally reached the issue of sanctions in a hearing on December 13. No. 06-60121, In re James Patrick Allen (Bankr. S.D. Tex. 1/9/07)(Memorandum Opinion Regarding Sanction of Creditor's Attorneys). Prior to this hearing, the Court was aware of what had happened. The important factual issue was why it happened, and whether this would serve to mitigate or explain away the erroneous pleadings. The testimony received on December 13th provided a window into the internal workings of a volume practice.

The initial attorney who handled the file testified that she recognized that the property was not the debtor's homestead. Based on this determination, none of the pleadings raising homestead-related issues should have been filed. Despite this conclusion, a clerical person apparently coded the file as a homestead case. Under the law firm's computer system, certain codes are entered which are then used to generate pleadings. In this case, a clerical employee apparently entered the wrong codes which then generated the wrong pleadings. Thus, garbage in, garbage out. The Court concluded that no meaningful review was given to the computer generated pleadings.

"There was no testimony that anyone at (lender's counsel) reviews the computer-generated pleadings (with the level of care required by FRBP 9011) before they are filed. It was the Court's sense of the testimony that either there is no review, or else the review is so superficial that it is meaningless."

The firm's response to the Court's initial warning about sanctionable conduct was also dictated by the computer system. When local counsel contacted the initial lawyer about the Court's concerns, she testified that she "could not believe the document that was filed under [her] password." However, because the file was coded as a homestead case, the instruction to withdraw the objection generated a pleading geared to a homestead case. The frightening thing is that the computer generated a pleading which might have been appropriate in a particular type of homestead case. However, the pleading would not be appropriate in all circumstances. Thus, even without the erroneous coding, the pleading could well have been wrong.

The Inconclusive Result

The Court found that the lender's principal law firm should be sanctioned for its conduct in the case. However, the Court did not enter a sanction at this time. The Court noted with frustration that he had previously reprimanded the firm and had ordered it to address quality control issues. Two other judges in the Southern District had published opinions about the firm's conduct, including one case where the firm was required to pay $65,000. The Court noted that sanctions under Rule 9011(c)(2) should be sufficient to deter further repetition of the conduct. The Court went on to state:

"Although the Court has concluded that there is sanctionable conduct, after two warnings and a $65,000 monetary sanction, the Court is at a loss to determine the appropriate sanction in this case. If the prior warnings and sanction have not worked, what will?"

The Court ordered the managing attorney of the firm's Houston office to appear at a hearing to be held and to "report to the Court what sanctions would deter further repetitions of this conduct."

This Order places the firm in an unusual position. It is being asked to recommend its own punishment. If the firm suggests too light of a sanction, it may invite severe penalties for failure to appreciate the gravity of its actions. But what is sufficient?

While the Court may well consider monetary sanctions, and will likely award attorney's fees to debtor's counsel, the Court appears to be looking for more of a structural solution. The problem here appears to be a law firm subservient to its computer system. In an atmosphere where codes entered by clerical employees can generate nonsensical pleadings, it is difficult to comply with the responsibilities of a professional. In this case, even the attempt to withdraw an erroneous pleading generated another factually defective document. Perhaps Judge Steen, like another judge before him, will sanction the computer. However, it seems more likely that he will order the humans to take control of the computer. Failing that, he may require that all future pleadings be written with a quill pen and bear the cursive penmanship of the attorney submitting the pleading.

Post-script: Local counsel, who had the unenviable task of presenting the flawed pleadings to the court, escaped sanctions. Although Local Rule 11.2 required local counsel to be fully informed and prepared, the court noted that this rule had not been strictly enforced in the past. Based on the hope that local counsel had "a much greater appreciation of his responsibilities to the Court," the Court declined to assess sanctions against him.

Don't Mess With Judge Bohm

This column has devoted several articles to lawyers behaving badly in Houston. The Houston judges have been very proactive in writing about unprofessional conduct lately. Before beginning, two important caveats are important. First, these cases generally deal with the bottom 1% of the bar and are not representative of the bar in general. Second, these cases are presently coming out of Houston, but they could happen anywhere. The latest installment of Lawyers Behaving Badly involves an attorney-debtor who filed cases in bad faith, ignored court orders, failed to appear, evaded the U.S. Marshals and could not count.

A Brief Trip to Bankruptcy Court

In In re David Ortiz, No. 05-39982 (Bankr. S.D. Tex. 10/13/06), the attorney debtor filed an initial chapter 7 petition in January 2005 to avoid being evicted from his law office. The case was assigned to Judge Isgur. The Debtor received only a short delay since the stay was lifted early on. Once the eviction was allowed to go forward, he lost interest in his case. The case was dismissed for failure to attend the 341 meeting on May 31, 2005. Judge Isgur dismissed the case with prejudice to refiling for 180 days. Unfortunately, because the Debtor failed to update his address (most likely the one that he had been evicted from), he claimed that he never received the notice.

Return to Bankruptcy Court

Less than one month later, on June 29, 2005, the Debtor filed his second case, which was assigned to Judge Bohm. This case was filed for the same reason as the first case. In the space of six months, the Debtor had managed to find another landlord, fall behind on the rent and receive eviction papers.

Things Start to Get Bad—The First Sanctions Order

The U.S. Trustee promptly moved for sanctions. The Debtor appeared and pleaded ignorance of the prior order. The patient Judge Bohm agreed to abate the U.S. Trustee’s motion long enough to allow the Debtor to return to Judge Isgur and seek a modification of the prior order. When the parties returned to Court, Judge Bohm found that the Debtor had not sought to modify Judge Isgur’s order. He also determined that the Debtor had failed to file accurate schedules and did not have a good reason for failing to appear at the 341 meeting in the first case. At that point, Judge Bohm ordered the Debtor to pay attorney’s fees of $1,875 to each of his landlords and continued the matter to consider whether other sanctions might be appropriate. The Debtor finally retained an attorney at this point. At the continued hearing, Judge Bohm ordered that the Debtor pay $1,000 in sanctions to the Clerk within 60 days and barred him from filing again for a year without prior permission.

Things Get Worse--The Bench Warrant(s)

By the time of the first sanctions order on November 17, 2005, the Debtor had angered a federal bankruptcy judge. However, his problems could have been solved by paying $4,750. It would have been a really good idea to comply with this order through whatever means possible. The Debtor didn’t get the message. Some four months later, the U.S. Trustee filed a Certificate of Non-Compliance indicating that the Clerk had not been paid. Judge Bohm scheduled yet another hearing, which was continued to May 10, 2006. Neither the Debtor nor his attorney appeared at this hearing. The Debtor also failed to accept service from the U.S. Trustee’s process server after agreeing to do so. Judge Bohm issued a bench warrant that day.

In response to the bench warrant, an attorney who said she was acting merely as an intermediary contacted the U.S. Marshal and promised to inform the Debtor about the bench warrant. She gave the Marshal a non-working number for the Debtor. When the Debtor could not be located at his home or office, Judge Bohm issued a bench warrant for the intermediary attorney. This bench warrant met with more success and the “intermediary” appeared and testified that the Debtor was aware that there was a bench warrant out for him, but wanted to meet with his attorney first. Judge Bohm ordered the intermediary to check in with the U.S. Marshal twice a day until the Debtor was apprehended.

Judge Bohm Tries to Get the Debtor’s Attention—The Second Sanctions Order

On May 16, 2006, Judge Bohm, who had no doubt progressed from furious to livid, issued a second sanctions order which required the Debtor to pay $500 per day for each day that he failed to surrender and to pay $250 per day for each day that he failed to pay the $1,000 sanction to the clerk. The Court ordered the Debtor’s attorney to appear two days later to report whether he had informed the Debtor of the second sanctions order.

Melt-Down—The Third Sanctions Order

On May 18, 2006, the Debtor appeared with a new attorney (a respected bankruptcy attorney) and paid the $1,000 owing to the Clerk. The Debtor claimed that while he was aware of the May 10 hearing, that his attorney was scheduled to be out of the country and assured him that he would get the hearing re-set. The attorney did not do this. However, when the Debtor contacted the attorney’s office to see if any arrangements had been made, he was told that they were not aware of any, but that that the attorney would not have left town without having done something. The Debtor also testified that when he learned of the bench warrant, he checked into a hotel to avoid being found.

Judge Bohm was not amused. However, the order he entered was remarkably restrained. He ordered the Debtor to:

1. Write a letter apologizing to the U.S. Marshals for not turning himself in immediately;
2. Contact the Texas Lawyers Assistance Program to see if he would benefit from counseling;
3. Take 10 hours of bankruptcy continuing legal education (including three hours of ethics) if he ever planned to appear in the Southern District again;
4. Find other counsel for a client he was currently representing in a chapter 7 case; and
5. Either pay $750.00 or write “I will respect the judicial system, and such respect includes obeying all court orders” 750 times.

Judge Bohm gave the Debtor five days to comply.

When the Debtor returned five days later, he only tendered 700 sentences instead of 750, he had failed to pay the prior sanction to his landlords and he had failed to find alternate counsel for his client (whose case was subsequently dismissed by Judge Brown). However, he did complete his CLE.

The Judge gave the Debtor one more opportunity to comply and at the next hearing, he presented cashier’s checks to pay his landlords’ attorney’s fees and tendered the remaining 50 sentences. As a final sanction, the Court wrote a lengthy opinion chronicling the pattern of abuse which had led to his orders.

What Were They Thinking?

Attorneys make mistakes. Sometimes the difference between a good attorney and a disgraced attorney is the ability to engage in damage control. The attorney(s) here did not learn that lesson.

Mr. Ortiz’s motivations in filing bankruptcy to avoid eviction were not pure. Filing a second bankruptcy in violation of a court order that he arguably did not know about was bad but not fatal. At this stage, the Debtor/Attorney had a problem, but the court offered a way out (returning to Judge Isgur to modify the prior order of dismissal). This was a serious mistake.

When the Debtor missed his first opportunity to extricate himself, he could have begged or borrowed the money to pay the initial sanctions and limped away, humbled but not crushed. However, at the point that he failed to appear in court and then evaded the U.S. Marshal, he risked serious jail time. The fact that the ultimate consequences were so light may have been because the Debtor finally retained a competent bankruptcy attorney or perhaps because the court was happy just to have gotten his attention. However, it is clear that things could have been worse—much worse.

The Debtor’s first attorney and the “intermediary” attorney do not come off very well either. The opinion does not explain why the first attorney went off to Jordan without obtaining a continuance of the May 10 hearing. However, the attorney had to know that he was dealing with an extremely volatile situation. His absence caused a bench warrant to be issued for his client. The attorney who appeared only as an intermediary does not fare very well either. She was in contact with the Debtor on a regular basis, but somehow managed to provide the U.S. Marshal with a non-working number to contact him. The court found her testimony to be less than forthcoming.

When all was said and done, three attorneys found themselves named in an opinion which did not reflect well upon them. This opinion should be made required reading in legal ethics courses.