Many consumer debtor attorneys have chosen to enhance their revenue by filing suit on relatively minor violations of the automatic stay or discharge. There is nothing inherently wrong with these suits since they vindicate the rights that debtors receive when they file bankruptcy. However, some practitioners have resorted to filing form complaints which go on for hundreds of paragraphs with boilerplate allegations about the callousness of the particular creditor. Recently, a creditors' lawyer fought back against exaggerated allegations in a complaint against his client and succeeded in recovering sanctions under Fed.R.Bankr.P. 9011. Defeo v. Winyah Surgical Specialists, P.A. (In re Defeo). 2021 Bankr. LEXIS 2685 (Bankr. D. S.C. 9/27/21).
What Happened
In the Defeo case, a medical practice sent a chapter 13 debtor an invoice for $910 after bankruptcy had been filed. The debtor had not listed the debt in its schedules so the creditor was not aware of the automatic stay. Debtor's counsel contacted the creditor who followed its normal procedures to note the account as being in bankruptcy. However, due to an error in settings, the notation did not save.
Several months later, the medical practice sent the debtor a second bill which stated "Your account in in default and could be sent to a collection agency. Please call." Six days later, debtor's counsel filed a complaint which contained the following allegations ("the Disputed Allegations"):
a. "[W]ith a specific intent to violate bankruptcy laws, [Defendant] contacted [Debtor] by mail dated February 3, 2021 illegally attempting to collect a $910.00 debt listed in [Debtor's] bankruptcy case." (Compl., ¶ 9.)
b. "Notwithstanding being on Notice of this monetary exposure for violating the Automatic stay the Defendant chose to flagrantly, wantonly and with gross disdain and disregard violate the bedrock of the bankruptcy process." (Compl., ¶ 10.)
c. "The Defendant's acts, by and through its agents, servants and/or employees, establish this creditor as one that does not hesitate to engage in overly aggressive, devious, deceptive, manipulative, oppressive, abusive and illegal collection." (Compl., ¶ 11.)
d. "Upon information and belief, the Defendant knew of [Debtor's] bankruptcy filing yet willfully, deliberately and intentionally chose to ignore the automatic stay provisions of 11 U.S.C. § 362." (Compl., ¶ 13.)
e. "[Debtor] would show that said aforementioned collection act [i.e., Defendant's mailing of the invoice] was done with the express intent to annoy, threaten, cause harm, abuse, intimidate or harass him." (Compl., ¶ 14.)
f. "Defendant has engaged in acts which constitute a flagrant, willful, knowing and intentional violation of the bankruptcy automatic stay." (Compl., ¶ 17.)
Opinion, at *4-5.. The caption of the pleading also stated: ACTUAL AND PUNITIVE DAMAGES: $50,000.
The creditors' lawyer served the debtor's counsel with its proposed motion for sanctions and waited twenty-one days before filing it. The motion alleged that the Debtor would not have included the allegations stated above in the Complaint if he had conducted even a minimal allegation and that the Complaint was filed for the improper purpose of needlessly increasing expenses.
When the Debtor did not withdraw the disputed allegations, the Creditor filed his motion with the court and the court conducted a hearing.
The Court's Ruling
The Court noted that under Rule 9011(b):
By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
* * *
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; (emphasis in original)
The Court found that the plaintiff did not conduct a reasonable inquiry before making the Disputed Allegations.
None of Debtor's Counsel's referenced efforts relate to the mailing of the second invoice which is the subject of the claim for willful violation of automatic stay. The record reflects a negligible, if any at all, investigation into the facts by Debtor's Counsel. It appears from the Complaint that the only evidence available to Debtor's Counsel at the time of the filing of the Complaint was the disputed invoice received by Debtor and Debtor's statements that he experienced stress and worry upon receiving that invoice.
However, the Complaint contains several specific allegations regarding the mindset of Defendant, including that Defendant "chose to flagrantly, wantonly and with gross disdain and disregard violate the bedrock of the bankruptcy process" and that "the collection act was done with the express intent to annoy, threaten, cause harm, abuse, intimidate or harass [Debtor]," but there was no investigation or inquiry conducted by Debtor's Counsel whereby such a mindset or intent could have been expressed or revealed by Defendant. Debtor's Counsel admitted that neither they nor Debtor attempted to contact Defendant after the mailing of the disputed invoice. No witnesses were interviewed regarding the facts of the case. Prior to filing the Complaint, Debtor's Counsel uncovered no other communications from Defendant to Debtor, such as threatening letters, emails, calls, text messages, personal visits or lawsuits, which would support such allegations.
Opinion at *12-13. After rejecting several other arguments made by plaintiff's counsel, the court found that the plaintiff's counsel failed to make a reasonable inquiry before making the Disputed Allegations.
The Court did not reach the issue of whether the complaint was filed for an improper purpose, noting that the records was mixed.
Under the circumstances of this case, the Court finds that the Complaint appears to have been filed for the reasonable purpose of seeking to enforce Debtor's rights under the Bankruptcy Code to be protected by the automatic stay from further collection efforts from Defendant. It also appears, however, that the Complaint was filed for the additional purpose of obtaining a substantial damages award or settlement, including attorney's fees and punitive damages, which may be unjustified under the circumstances of this case. The prominent placement of a demand for $50,000 in actual and punitive damages on the front page of the Complaint and extreme characterization of Defendant's conduct within the Complaint is indicative of Debtor's Counsel's desire to threaten and intimidate the Defendant by increasing the perceived financial risk to Defendant. This could be considered bad faith or an improper purpose that is so excessive as to eliminate the proper purpose of seeking the protection of the automatic stay on behalf of Debtor. See id. at 518. In light of the Court's finding that sanctions are appropriate under Rule 9011(b)(3), it is unnecessary for the Court to determine this issue at this time.
Opinion at *25-26.
The defendant's counsel sought reimbursement of $37,000 in attorneys' fees, of which approximately $13,000 related directly to the motion for sanctions. The Court found that Rule 9011 requires that the Court impose the least sanction necessary to deter future violations. It awarded $10,000 in sanctions and struck the Disputed Allegations.
What It Means
This case illustrates why most cases settle. The defense invested $37,000 in a case over a $900 invoice and recovered $10,000 back but must still litigate the underlying stay violation. The debtor's counsel set out to vindicate its client's rights and make some money and wound up owing $10,000. The continuing interactions between these two lawyers and between the two sets of lawyers and their clients is likely to be tense going forward.
While the cost-benefit analysis for both parties has turned out badly, the opinion provides a cautionary tale to other parties in similar situations. The lesson for the plaintiff is simple. Don't use form complaints which contain outrageous allegations that bear no relation to the current case. Be prepared to file complaints which resemble the TV show Dragnet ("just the facts ma'am") more than cable news shouting matches. The secondary lesson is that if you get caught filing the complaint full of inapplicable outrage, withdraw the offending allegations when you receive the safe harbor letter. Rule 9011 encourages parties to remedy their bad behavior. If you have a chance for grace, take it.
This case illustrates the difficult position that defense counsel has in representing small creditors. While the creditor's offense was small, the debtor's threat to recover $50,000 was likely an existential threat to the creditor's continuing existence. In a more enlightened error, plaintiff's counsel would have picked up the phone and solved the problem without filing suit. However, once the suit was filed, the defendant had to hire counsel and deal with it. The logical course would be to admit liability and negotiate a minimal settlement. However, if plaintiff's counsel was unreasonable, then defense counsel would have been justified in serving the proposed Rule 9011 motion, even if there was a possibility that the plaintiff's counsel would comply with Rule 9011 and withdraw the offending allegations. What does not make sense, and what is not explained by the record, is why the defense counsel would spend nearly $37,000 on such a small case. Maybe the client told counsel to spend whatever it took. Maybe the case involved old grievances between the attorneys. We don't know. We just know the result.
There is one other thing that defense counsel did right that I have not mentioned yet. At the same time that counsel served the proposed motion on the plaintiff, he also submitted an offer of judgment. The way an offer of judgment works is that if the plaintiff accepts the offer, the case is resolved. If the plaintiff does not accept the offer and recovers less than the amount of the offer, the plaintiff cannot recover any costs after the date of the offer. Costs is generally construed to include attorney's fees. A well drafted offer of judgment can deter a plaintiff from racking up big fees in the hopes of recovering a big judgment. Not all clients will authorize an offer of judgment, but it makes sense in a small case where liability is clear but damages should be slight.
No comments:
Post a Comment