Monday, May 07, 2007

Brief Representation Comes Back to Haunt Attorney Six Years Later

“The law has not been dead, though it has slept.” Shakespeare, Measure for Measure, Act. II, Scene ii, l. 90.

A Houston lawyer recently discovered that the passage of time was not sufficient to protect him from the consequences of actions taken in a brief representation nearly six years earlier. In re Cochener, 2007 Bankr. LEXIS 460 (Bankr. S.D. Tex. 2/6/07). The Court began its tome of an opinion with the comment that:

“In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to rectify perceived fraud and abuse in the bankruptcy system. . . . In the case at bar, which was initiated upon the voluntary filing of a Chapter 7 petition in 2001, the conduct of (the Debtor) and one of her attorneys demonstrates why Congress perceived that there was sufficient abuse to warrant passage of this legislation.”

That a federal bankruptcy judge would acknowledge that BAPCPA might have been a legitimate response to a problem is extraordinary enough that this case bears some scrutiny.

What Happened

The Debtor filed her chapter 7 petition on May 1, 2001, some six months after being divorced. She showed $403.00 in assets and approximately $111,000.00 in debts. The Debtor’s ex-husband informed the Trustee that the Schedules and Statement of Financial Affairs were far from accurate. As a result, the Trustee asked some searching questions and requested additional documents at the first meeting of creditors. The Debtor’s initial lawyer agreed that the documents would be produced and that the Debtor would appear for a continued creditors’ meeting.

Based on the conduct of the first meeting, the Debtor’s attorney had enough sense to realize that he was in over his head. He referred the Debtor to an attorney who was Board Certified in Consumer Bankruptcy Law and had been practicing for fifteen years. He also told the new attorney that there were allegations of concealed assets.

The new attorney apparently decided that the Debtor had made a horrible mistake in filing for bankruptcy. Even before he was formally substituted into the case, he prepared and filed a Motion to Dismiss the chapter 7 case. The motion represented that the interests of creditors would be better served by permitting dismissal and that no creditor would be prejudiced by dismissal. However, the motion did not make any factual allegations. At the same time, counsel blithely informed the trustee that based on the motion to dismiss, the Debtor would not be attending the continued meeting. The Trustee objected to the dismissal and informed the Debtor’s new counsel that attendance at the creditor’s meeting was not optional.

Nevertheless, the Debtor and her new counsel failed to attend the creditors’ meeting, which the Trustee continued yet again. The Debtor’s substitute counsel informed the Trustee that they would not be attending once again, based on the pending Motion to Dismiss. The Debtor also failed to produce any of the documents requested.

At the hearing upon the Debtor’s Motion to Dismiss, the Court apparently continued the hearing and instructed the Trustee to conduct discovery. When the Trustee requested dates for a Rule 2004 exam, Debtor’s counsel did not respond. When the Trustee noticed the exam anyway, Debtor’s counsel objected to the production requests on the basis that they went back more than one year. This was material because one of the allegations was that the Debtor had transferred property to her son more than one year before the petition, but less than the four years in which an action could be commenced under the Texas Uniform Fraudulent Transfer Act.

The Debtor failed to appear for the scheduled Rule 2004 exam and counsel contended that he had not heard from her in several weeks. Shortly thereafter, the Debtor’s second lawyer filed a motion to withdraw. At this point, he had been representing the Debtor for just over five months. The Court allowed Debtor’s second attorney to withdraw, but noted that “This order is without prejudice to any claims, ethical or otherwise, held by the Ch. 7 trustee.”

The Trustee’s counsel informed Debtor’s second attorney that he should reimburse the Trustee for the cost of responding to the Motion to Dismiss. Counsel never accepted the Trustee’s offer to make amends. This would prove to be a poor choice.

The Motion to Dismiss was eventually denied, some eleven months after it was filed. The Trustee eventually found out that the Debtor had transferred away over $90,000 in assets. The Trustee obtained a default judgment in the adversary proceeding he brought to recover these assets. Finally, several years later and after filing a forcible detainer action, the Trustee recovered two pieces of real property. The properties had been thoroughly trashed and the words “Thou Shalt Not Steal or Covet” and other similar phrases had been written on the walls. The Debtor and her son blamed this vandalism upon day laborers who did not otherwise speak English but were apparently able to quote the Bible in a foreign language.

On May 9, 2006, the Trustee’s counsel sent Debtor’s substitute counsel the first of several letters stating that the Trustee intended to seek sanctions. The third letter provided Debtor’s counsel with a proposed motion for sanctions and informed him that the motion would be filed the next day if a settlement offer was not forthcoming. Debtor’s counsel did not make a settlement offer and so the Motion for Sanctions was filed some five years after the substitute counsel had first been retained. The Court subsequently issued its own show cause order requiring the Debtor, her son and the initial attorney to show cause why they should not be sanctioned as well.

At the hearing on sanctions, it was brought out that Debtor’s second attorney was the same attorney who had been sanctioned by Judge Steen in the case of In re Thomas, 337 B.R. 879 (Bankr. S.D. Tex. 2006), which had involved false scheduling of IRS claims.

The Court’s Ruling

One of the more interesting aspects of this case was the passage of time. Although not explicitly stated by the court, claims for sanctions are apparently not subject to traditional limitations periods. In the introduction to its opinion, the Court summarily disposed of the delay issue, stating:

"The attorney . . . raises certain defenses, not the least of which is that his actions occurred in 2001, and to sanction him now after the passage of this much time is absurd and unfair. It is neither. Indeed, (counsel) has known since 2001 that the Chapter 7 trustee was very unhappy with his conduct, and ever since the Trustee's initial expression to (counsel) of misgivings about his conduct, the Trustee has repeatedly told him that he needed to reimburse the Trustee for the unnecessary legal fees and expenses which the Trustee incurred due to (counsel's) conduct. . . . Given that, in 2006, the Trustee was finally able to liquidate certain assets, the existence of which (counsel) did everything in 2001 to prevent the Trustee from uncovering , the Trustee's Motion for Sanctions is hardly absurd or untimely. Just the converse: it is reasonable and timely."

Opinion, at 2-3.

Thus, with apologies to Neil Young, sanctions, like rust, never sleep.

Having disposed of the timeliness issue, the Court concluded that Rule 9011 did not apply. Because the Trustee did not send a sanctions demand letter until May 9, 2006, some four years after the court ruled upon the motion to dismiss, counsel was never given the opportunity to withdraw the offending pleading. As a result, sanctions under this rule were not available. However, that was not the end of the inquiry.

Instead, the Court found that it could use its inherent powers under §105 to impose sanctions. On the surface, this appears to be an end run around the text of the rule. However, it is one endorsed by the Supreme Court. In Chambers v. Masco, 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), the Supreme Court stated that a court’s inherent power includes situations where “neither the statute nor the Rules are up to the task.” Thus, the text of Rule 9011 appears to be largely superfluous, since the court can find that the rule is not up to the task and grant relief beyond what is expressly authorized.

The Court also found that where the relief requested does not include disbarment or suspension, that proof by a preponderance of the evidence will suffice.

The Court found that counsel had engaged in five instances of sanctionable conduct: (1) he “concocted” a reason for her not to attend the first meeting of creditors and then instructed her not to do so; (2) he personally did not attend the meeting of creditors; (3) he filed a Motion to Dismiss “which included blatantly false factual and legal contentions;” (4) he wrote a letter to the Trustee’s counsel objecting to production of documents which disingenuously argued the wrong look-back period as a ground for not producing documents; and (5) he instructed the Debtor not to produce documents after prior counsel had agreed that the Debtor would do so. The Court found that sanctions were particularly appropriate because the attorney was board certified.

The Court also found that sanctions could be imposed under 28 U.S.C. §1927, which allows the court to order any attorney “who so multiplies the proceedings in any case unreasonably or vexatiously” to pay “the excess costs, expenses and attorneys’ fees reasonably incurred because of such conduct.”

The Court imposed aggregate sanctions in the amount of $25,121.89 against the Debtor’s substitute counsel, consisting of: (1) disgorgement of the $2,500 retainer paid to counsel; (2) reimbursement of the Trustee’s attorney’s fees of $6,901.25 and costs of $704.47 incurred in responding to the Motion to Dismiss; and (3) reimbursement of the Trustee’s attorney’s fees of $13,951.25 and costs of $1,064.92 incurred in prosecuting the Motion for Sanctions. The Court also imposed sanctions against the Debtor and her son in the amount of $50,000 for damage to the real properties.

In its Conclusion, the Court made the following comments which summed up its feelings about the matter:

“Lawyers occupy a special position in this country’s judicial system. Not only are they representatives of an advocates for their clients, but they are also officers of the court who bear responsibility for ensuring the integrity and fairness of our judicial system. (citation omitted). Particularly in the consumer bankruptcy system, where the clients are typically very unsophisticated about their legal duties and in desperate straits personally, attorneys must take emphatic care to encourage their clients to comply with the requirements of the Bankruptcy Code and the Bankruptcy Rules.

“In the case at bar, (Debtor’s substitute counsel) not only failed to take such care; he went out of his way to encourage the Debtor to disregard the duties imposed upon her. . . .

“At the Sanctions hearing, (Debtor’s substitute counsel) testified that ‘I believe my representation of (the Debtor) was in accordance with acceptable practice. (citation omitted). This Court strongly disagrees. (Counsel’s) gaming of the judicial process by filing a frivolous Motion to Dismiss, his instructions to the Debtor not to attend the continued Meeting of Creditors and not to produce documents which (Debtor’s original counsel) had already agreed she would produce, and his misinforming the Trustee’s counsel about the one-year look back period—all of which was done to impede the Trustee’s investigation of the Debtor’s financial affairs—was completely inimical to acceptable practice, in Houston or anywhere else.

In sum, (Counsel’s) conduct I this Court has done much to justify the passage of BAPCPA. Congress might well be pleased to know that its perception of abuse is not unfounded. Congress would probably not be pleased to learn about (Counsel’s) conduct. For his actions, he will need to immediately write a cashier’s check to the Trustee in the amount of $25,121.89.”

Opinion, at 143-145.

What Does It Mean?

The Court’s grounds for awarding sanctions raise questions about where zealous advocacy of a client ends and when obstruction of the bankruptcy process begins. The initial strategy employed by counsel sought to protect his client from the consequences of her actions. This strategy was one possible response to a difficult predicament. As noted by the Court:

“At the Sanctions hearing, (counsel) testified that his job as counsel for the Debtor, was to look out for her interests, not the interests of creditors. (citation omitted). This court agrees with (counsel) that he had a duty to look out for the Debtor’s interests. This Court disagrees with the approach that he took to do so.”

Because there is not an automatic right to dismiss a chapter 7 case, as there is in chapter 13, counsel faced the prospect that a tenacious trustee would refuse to let go of the case once allegations of fraud had been raised. That is in fact what happened. The case went south for counsel when he failed to change tactics once he became aware that the Trustee and the ex-husband were not going to allow the case to quietly go away. At this point, both his duty to the Court and his instinct for self-preservation should have created a conflict between him and his client. This conflict could only be resolved by insisting that the client cooperate with the Trustee or by making a prompt withdrawal. The fact that counsel continued to pursue a doomed strategy was not only a poor choice, but was guaranteed to earn the Trustee’s enmity and the Court’s disdain.

The Debtor in this case did not need much encouragement to behave badly. Unfortunately counsel provided, and continued to provide, that encouragement over a period of several months (at least according to the Court’s findings). A prompter attempt to make the Debtor cooperate with the Trustee probably would not have changed the Debtor’s behavior. However, it might have salvaged counsel’s reputation.

A second lesson to be learned is that Debtor’s counsel lost a valuable opportunity to quietly settle the matter. Over a period of several years, the Trustee’s counsel patiently counsel to reimburse the Trustee for his expenses in opposing the Motion to Dismiss. These quiet efforts were followed by several increasingly more insistent letters. Had counsel heeded these warnings and settled up with the Trustee, he could have limited his liability to $7,000 and avoided a 100+ page written opinion. This illustrates the rule that nearly any bad situation can be made worse by failing to address it early on.


This case was appealed to the U.S. District Court. On December 28, 2007, U.S. District Judge Sim Lake issued a Memorandum Opinion in which he affirmed the portion of the order requiring Debtor's counsel to return his retainer in the amount of $2,500, but reversed the remaining award in the amount of $22,621.89. Barry v. Sommers, No. H-07-0629 (S.D. Tex. 12/28/07). The case has now been appealed to the Fifth Circuit Court of Appeals.

On October 23, 2008, the Fifth Circuit reversed the District Court opinion and entered an order affirming the Bankruptcy Court opinion. Matter of Cochener, No. 08-20048, 2008 WL 4681579 (5th Cir. 2008).

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