Magee v. Howe (In re Carlson)

Magee v. Howe (In re Carlson), BAP No. WW-12-1522-KuDTa (BAP 9th Cir. Nov. 15, 2013)
The Bankruptcy Appellate Panel of the Ninth Circuit affirmed the Bankruptcy Court’s orders (1) imposing $2,685 in sanctions against the Debtor’s bankruptcy attorney and (2) denying the attorney’s motion for reconsideration.
Procedural context:
Appeal from the Bankruptcy Court for the Western District of Washington. After issuing an order to show cause regarding whether sanctions were appropriate, the Bankruptcy Court, under its inherent authority, imposed $2,685 in sanctions against the bankruptcy attorney. The Bankruptcy Court held that the bankruptcy attorney’s advice to the Debtor regarding her personal injury claims amounted to bad faith and was an intentional or reckless misstatement regarding the disclosure requirement under the plan confirmation order. The Bankruptcy Court subsequently denied the bankruptcy attorney’s motion to reconsider. The Bankruptcy Appellate Panel reviewed the Bankruptcy Court’s orders for an abuse of discretion.
In 2008, the Debtor confirmed her chapter 13 plan of reorganization. In April 2009, the Debtor retained a personal injury attorney to represent the Debtor in connection with claims against her insurance company and the other driver that arose from a car accident. In November 2009, the Debtor obtained a $25,000 settlement with the other driver. The Debtor then commenced a state court lawsuit in state court against her own insurance company regarding her underinsured motorist coverage in June 2010. During discovery, the Debtor disclosed her bankruptcy filing to her personal injury attorney and insurer for the first time. The personal injury attorney directed the Debtor to contact her bankruptcy attorney to inquire whether the collision-related claims needed to be disclosed to in her bankruptcy case. The Debtor claims that she then telephoned the bankruptcy attorney’s office, spoke with one or more staff members, and was told that she did not need to disclose the claims because they did not constitute income. According to the Debtor, in December 2010, she spoke directly with her bankruptcy attorney and asked if the claims needed to be disclosed. The bankruptcy attorney replied (1) that the Debtor did not need to worry about the claims because the claims were not income and (2) that she did not need to worry about reporting the claims because the chapter 13 trustee’s office was “a mess” due to internal issues and therefore was unlikely to catch any failure to disclose. The Debtor never disclosed the claims to either the chapter 13 trustee or the Bankruptcy Court. In May 2011, an arbitrator awarded the Debtor $50,000 on account of her claim against her insurer. After the Debtor moved to have the arbitration award reduced to judgment, her insurer filed a motion in the state court seeking to clarify to whom the arbitration award should be paid in light of the bankruptcy case. The insurer also notified the chapter 13 trustee regarding the arbitration award. Upon receipt of notice of the arbitration award, the chapter 13 trustee commenced a discharge revocation proceeding against the Debtor. In March 2012, the Bankruptcy Court revoked the Debtor’s discharge and reserved the issue of whether sanctions should be imposed against counsel. Shortly thereafter, the chapter 13 trustee filed a motion to modify the Debtor’s chapter 13 plan to use most of the proceeds from the arbitration award judgment to pay the remaining amount she owed to her unsecured creditors. After two hearings, the Bankruptcy Court found that only $850 of the arbitration award judgment was property of the estate that could and would be distributed pursuant to the proposed plan modification because that was the only portion attributable to the Debtor’s lost wages. At one of the plan modification hearings, the Bankruptcy Court stated that it was prepared issue an order to cause regarding whether sanctions might be appropriate against the bankruptcy attorney and the personal injury attorney for “their knowing and intentional failure to disclose to the [chapter 13] trustee the material change in [the Debtor’s] circumstances.” On March 19, 2012, the Bankruptcy Court issued its order to show cause regarding the sanctions.
Kurtz, Dunn, and Taylor, Bankruptcy Judges

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