Montedonico v. Blasingame (In re Blasingame)

2016 WL 6575045 (6th Cir. BAP 2016)
Court abused discretion in awarding sanctions under Rule 9011 where moving party did not comply with "safe harbor" provision; and under 28 USC Section 1927 where evidence did not support finding that attorney unreasonably or vexatiously multiplied proceeding.
Procedural context:
After bankruptcy court entered order denying debtor's discharge, creditors acting on behalf of estate filed motion for sanctions against debtor's counsel. Bankruptcy Court concluded that sanctions were appropriate under Rule 9011 and 28 USC Section 1927. On appeal, the Sixth Circuit BAP reversed.
Debtors' with assistance of counsel, filed Petition, Schedules and Statement of Affairs that were plainly incorrect, failing to disclose interests in trusts, multiple omitted assets, and various avoidable transfers. Debtors' counsel amended the schedules and SOFA multiple times but never disclosed all assets or true financial status. Court denied discharge under Section 727(a)(4). Attorney then filed Motion to Alter or Amend Judgment to assert defense of "reliance on counsel" and attached affidavits of attorneys acknowledging that they failed to properly advise the debtors and failed to disclose interests in various entities. Creditors, acting with derivative standing, filed a Motion for Sanctions for abuse of the litigation process, asserting that bankruptcy case should never have been filed, and that attorney acted with gross negligence in handling case for the start; and that attorneys changed their storiues as proceedings went on. Bankruptyc ourr awarded sanctions. BP reversed sanctions under Rule 9011 as creditors never served required Rule 9011 "safe harbor" letter. Rule 9011 allows court to award sanctions without safe harbor compliance only for frivolously filing petition. Attorney who did not sign petition cannot be held liable under Rule 9011 even if attorney "ghost wrote" the documents. Although attorney later advocated positions asserted in petition, that does not amount to "signing" the petition for purposes of Rule 9011. Sanctions also not warranted under Section 1927 where actions were, at worst, result of gross negligence rather than bad faith evidence to abuse the bankruptcy process.
Harrison, Humphrey, Preston

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