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.
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