Chapman, et al. v. U.S. Trustee

Summarized by David Hercher , U.S. Bankruptcy Court, District of Oregon
15 years 2 months ago

Citation:

Chapman v. U.S. Trustee (Matter of Aston-Nevada Limited Partnership), No. 08-15792 (9th Cir. Dec. 1, 2010)

Tag(s):

9th Circuit

Ruling:

In this memorandum the Ninth Circuit designated as not appropriate for publication, the court reversed the bankruptcy court’s imposition of heavy sanctions against the chapter 11 debtor’s lawyer and his firm, holding that the sanctions constituted a clearly erroneous abuse of discretion.

Procedural context:

The Ninth Circuit acted on the appeal by the lawyer and his firm from the district court’s order affirming the bankruptcy court’s sanctions order against the lawyer and his firm.

Facts:

The limited partnership debtor filed its petition pro se with one asset – a car – and one creditor, which held a security interest in the car. The debtor later hired the lawyer to defend the creditor’s relief-from-stay motion. The lawyer did not review the bankruptcy papers before the relief-from-stay hearing. There, in response to the bankruptcy judge’s question, the lawyer said he did not know whether the debtor owned only the car at issue. The court granted stay relief. The lawyer learned within a few days after the stay-relief hearing that the debtor indeed had only one asset, the car, and one creditor, and the lawyer then sought to dismiss the case. The creditor moved for sanctions against the debtor and its principal. The lawyer defended the debtor’s principal, arguing that the principal’s conduct, while improper, was not sanctionable because the principal subjectively believed that he was doing the right thing. The court found that the petition filing was in bad faith. The court held the debtor and the principal liable for the creditor’s attorney fees, but initially did not impose sanctions against the lawyer. The court later issued a sua sponte order that the lawyer and his firm show cause why they should not be sanctioned for conspiring with the debtor and the principal. In an opinion, the court speculated that the lawyer might have ghost-written the petition and reprimanded the lawyer and his firm for opposing the stay-relief motion, finding that the principal had told the lawyer that the estate had just one asset before the stay-relief hearing. After a hearing, the court heavily sanctioned the lawyer and his firm, requiring that they pay nearly $10,000 to charity under the court’s inherent power, reprimanding them by publishing the court’s opinion, prohibiting them from appearing in or filing any paper in bankruptcy court in that district without first filing proof of having taken specified quantities of bankruptcy and ethics CLE, and requiring that they disgorge the $2,384.87 fee the principal paid the firm for its representation of the debtor. The Ninth Circuit agreed that the debtor filed its chapter 11 petition without merit, in bad faith, and with improper purpose, the lawyer negligently failed to review the bankruptcy papers and become familiar with the estate’s assets before defending the stay-relief motion, and he should have moved to dismiss the case without opposing the stay-relief motion. But the lawyer’s argument in defense of the sanctions motion against the principal did not constitute bad faith, and the bankruptcy court should not have imputed the debtor’s bad faith and improper purpose in filing the petition to the debtor’s lawyer, who did not participate in filing the petition. Also, the evidence is clear that the lawyer did not know the estate had just one asset until after the stay-relief hearing. The bankruptcy court based its sanctions motion on a clearly erroneous assessment of the evidence. Sanctions ordered pursuant to the court’s inherent power, as well as Rule 9011 sanctions, should not penalize. The bankruptcy court abused its discretion by imposing intemperate, punitive, and egregiously harsh sanctions against the lawyer and his firm.

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