Saturday, November 27, 2010

Attorney Pays Steep Price for Unauthorized Filing

When dealing with the Soviet Union, Ronald Reagan famously quoted the Russian proverb "trust but verify." An experienced bankruptcy lawyer from Las Vegas would have avoided a lot of trouble if he had heeded this advice. In re Blue Pine Group, Inc., No. BK-S-09-13274-BAM (Bankr. D. Nev. 10/7/10. You can find the opinion here. (PACER registration required).

What Happened

Blue Pine Group, Inc. was a Nevada corporation with ownership split 50/50 between a California group and a Las Vegas group with a four person board of directors. The two shareholder groups didn't get along, resulting in a suit filed by the California group. The Las Vegas group "retaliated" (the Court's word) by hiring a bankruptcy lawyer to file chapter 7 for the company.

Under the Local Rules of the Bankruptcy Court for the District of Nevada, a bankruptcy petition for a corporation must be accompanied by a copy of a board resolution authorizing the filing. The attorney did not have one, but was assured by the attorney for the Las Vegas faction that the Board had in fact passed a resolution. This turned out not to be true.

Pressed by the Las Vegas faction to get the case on file in order to stop the Californians from looting the company, the Debtor's attorney filed a set of schedules and a statement of financial affairs. The Clerk assigned the filing a case number even though no petition had been filed. The Debtor's attorney also filed a "Declaration re: Electronic Filing of Petition" in which he swore under penalty of perjury that the filing was authorized.

Three days later, the attorney for the California faction wrote to the Debtor's attorney objecting to the filing. He included the corporation's articles of incorporation which showed the four initial directors. He also asserted that the California group owned 50% of the company.

Several days later, the Debtor's attorney received a corporate resolution signed by the Las Vegas directors only. He was told that these were the only signatures required since the California directors had been removed. He did not request evidence of these assertions. It turned out that the California directors were removed at a meeting that they were not given notice of, so that the action was invalid.

Finally, seven days after the initial filing, the Debtor's attorney filed a bankruptcy petition signed by one of the Las Vegas parties. The Debtor's attorney also filed an adversary proceeding against the California parties without consulting the Chapter 7 trustee.

The California group filed a Motion to Dismiss the case, which the Court granted. The Californians then filed a Motion for Sanctions against the Debtor's lawyer. They did not file against the Las Vegas group because they had previously settled with them. The Court granted the Motion for Sanctions and awarded $109,528 to the California group.

Authority for Sanctions

Under Rule 9011, an attorney who signs a bankruptcy petition certifies that it is not being presented for any improper purpose and that the allegations contained therein have evidentiary support or, if expressly stated, are likely to have evidentiary support after opportunity for further investigation and discovery. This was a problem for the Debtor's attorney because the petition was filed for an improper purpose (retaliating against the California group) and he failed to adequately investigate his client's claim that it was authorized. He also continued to defend the filing after it should have been clear that it was problematic.

The Debtor's attorney defended by asserting that he was simply following his client's instructions. The court rejected this defense.

Mr. (Debtor's Attorney) defended in part on the assertion that the need for relief, as stated to him by the client, justified his continuing efforts to defend the initial petition. This justification may seem to be absolute, but the rules of professional responsibility, applicable to all lawyers, underscore that it is not: a client’s demands cannot alone support taking unjustified and unjustifiable positions. Rule 3.1 of Nevada’s Rules of Professional Conduct states:

"A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law. . . ."

This rule requires a lawyer to exercise independent judgment with respect to claims a client wishes to bring and to decline to pursue claims that are frivolous. As indicated in a leading treatise:

"[A] lawyer’s duty to refrain from making frivolous contentions will result in conflict with the client if the client insists that the contentions nevertheless be made. When such conflicts arise, Model Rule 3.1 and practice rules such as Rule 11 of the Federal Rules of Civil Procedure dictate that the interests of the fair administration of justice must be given priority over the client’s desires."

(citation omitted).
Memorandum, p. 7.

The Court also faulted the attorney for continuing to follow his client's instructions after the position had become untenable.

This “later advocating” of an untenable position (and the corresponding failure to take corrective action, such as removing his inaccurate filings from the docket) was (Debtor's Lawyer's) primary failing in this matter and forms the basis for the restitutionary award to Humitech. To quote Hazard, Hodes & Jarvis:

"If the lawyer carries out the client’s instruction after becoming aware of the frivolous nature of the contentions, both the lawyer and the client can be civilly liable for sanctions under FRCP Rule 11, as well as subject to the exercise of the court’s inherent supervisory powers."

(citation omitted). As this court has previously stated:

"To act on such frivolous claims, then, without independent investigation, was to succumb to the so-called “butler-style” of representation, under which the sequaciously servile lawyer does whatever the client wants and then cites that client’s command as a shield to the improper actions. This style of lawyering, however, has no place in bankruptcy court or, for that matter, in any court. (citation omitted)."
Memorandum, p. 10.

I had to look up "sequaciously servile" to fully comprehend the passage. The Random House College Dictionary defines "sequacious" as "following, imitating, or serving another person, esp. unreasonably." It defines "servile" as "slavishly submissive or obsequious; fawning." Thus, it means a slavishly submissive following of another person. Since attorneys are supposed to be strong-willed, it is a strong insult to be labeled as submissive.

What It Means

This was a case where an attorney was hung out to dry for blindly listening to his client. The client meanwhile settled with the other side and escaped liability. This shows the delicate tightrope that attorneys must walk between representing their clients zealously and protecting themselves from their clients. If the attorney's testimony is to be given credence, he was lied to by both his client and his client's other attorney. However, under Judge Markell's opinion, being lied to is not a defense to a sanctions motion if the attorney should have investigated his client's statements more carefully.

The Debtor's attorney could have protected himself better at several points:

1. He could have refused to file the case until he had the corporate resolution.
2. Once a question was raised about the validity of the corporate resolution, he could have asked to see the corporate documents removing the other two directors.
3. When his client could not back up his statements, he could have withdrawn and refused to defend against the Motion to Dismiss.

The attorney's fees incurred of $109,528 seem excessive for a case which was dismissed within 90 days of filing. However, the tone of the opinion suggests that the case was vigorously fought. The Court refers to "needless discovery disputes." Thus, the Court's ire may have been raised by the fact that the attorney not only asserted frivolous positions, but did so aggressively. That is one explanation for the high level of the fees. Another possibility is that the California group knew they were likely to win and engaged in a bit of piling on. However, it is impossible to tell from the opinion.

The case has been appealed to the Ninth Circuit Bankruptcy Appellate Panel.


Massachusetts Bankruptcy said...

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