In re MaGee “BAP upheld sanctions against Chapter 13 debtor’s attorney for advising debtor not to disclose a post-confirmation accident claim”

December 17, 2013

Dear constituency list members of the Insolvency Law Committee:

SUMMARY:

The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) recently upheld sanctions of $2,685 against a chapter 13 debtor’s attorney for advising the debtor (“Debtor”) not to disclose a post-confirmation auto accident claim.  To read the opinion, click here:

http://cdn.ca9.uscourts.gov/datastore/bap/2013/11/21/Carlson%20memo%2012-1522.pdf

In re MaGee, 2013 Westlaw  5310472 (9th Cir. BAP unpublished).

Basic Facts:  Debtor, represented by counsel (“Counsel”), confirmed her chapter 13 plan.  In relevant part, the confirmation order provided that “the debtor shall inform the Trustee of any changes in circumstances or receipt of additional income. . . .”

The Debtor and her husband were subsequently involved in a car accident. The Debtor and her husband met with Counsel (the husband was contemplating his own bankruptcy case), and the Debtor disclosed the auto accident and a pending lawsuit against the Debtor’s insurance company on her underinsured motorist coverage (“UIM Claim”).   Counsel allegedly told the Debtor she did not need to disclose the UIM Claim and (anticipated) monetary recovery because (1) it was not income, and (2) the chapter 13 trustee was unlikely to catch any failure to disclose.

Following arbitration of the UIM claim which awarded the Debtor close to $50,000, the Debtor’s insurer notified the chapter 13 trustee and sought clarification as to whom the money should be paid in light of the bankruptcy.  The trustee then commenced discharge revocation proceedings against the Debtor (which the court granted, but then re-instated after the court imposed sanctions against Counsel), and filed a motion seeking to modify the plan to use most of the proceeds from the Debtor’s $50,000 arbitration award judgment to pay the remaining amount owed to her unsecured creditors. The Debtor opposed that motion.  The bankruptcy court determined that only $850 of the arbitration award judgment was attributable to the Debtor’s lost wages, and only that portion of the judgment was property of the estate that could and would be distributed pursuant to the trustee’s proposed plan modification.

The court then issued an Order to Show Cause (“OSC”) setting forth the facts on which the court felt sanctions might be imposed.  The order did not specify the legal basis pursuant to which sanctions might be imposed, but at a status conference on the Order to Show Cause the court notified Counsel that it was relying on its inherent authority as the legal basis for the OSC.  Following a two-day evidentiary hearing, the bankruptcy court imposed $2,685 in sanctions against Counsel (the fee he had charged in the case), payable to the trustee and for distribution to the Debtor’s creditors under her modified chapter 13 plan.  The bankruptcy court held that Counsel’s response to the Debtor’s inquiry regarding the claims amounted to bad faith and was an intentional or reckless misstatement regarding the disclosure requirement under the plan confirmation order.

On appeal, the BAP upheld the ruling of the bankruptcy court.

Reasoning: The main issue on appeal was the factual dispute over what the Debtor told Counsel and what Counsel told the Debtor.  The BAP upheld the bankruptcy court’s findings which credited the Debtor and discounted Counsel’s testimony, since the findings were not illogical, implausible or without support in the record. United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).  Once Counsel knew of the UIM claim, “he thereafter had a duty, as the Debtor’s legal representative and as an officer of the court, to help her to

comply with the bankruptcy court’s confirmation order by facilitating her disclosure of the claims. . . . A litigant’s counsel engages in bad faith conduct sanctionable under the bankruptcy court’s inherent authority when he or she intentionally impedes enforcement of the court’s orders. See Miller v. Cardinale (In re Deville), 280 B.R. 483, 495–96 (9th Cir. BAP 2002), aff’d., 361 F.3d 539 (9th Cir. 2004)(affirming inherent authority sanctions award against litigant and his counsel based in part on their mutual efforts to hamper enforcement of the court’s orders).”  The BAP ruled that Counsel had adequate notice to defend the sanctions, and that the amount was not punitive but was properly compensatory.

Author’s Comment:

This decision offers three important reminders for Debtor’s attorneys:

First: Disclose, disclose, disclose – even if you believe the claim is not property of the estate.  Notably, the court found that of the nearly $50,000 insurance award, only $850 was attributable to lost wages, which was the only portion that had to be paid under the Debtor’s chapter 13 plan.

Second:  don’t expect to fare well if you as an attorney get into a factual dispute with your client and you do not have detailed records.

Third:  Sanctions determinations are made based upon the known facts and procedural posture extant at the time sanctions are imposed.  Here, the basis for sanctions was that Counsel should not receive compensation since the Debtor’s discharge was revoked.  By the time of the appeal, however, the Debtor’s discharge had been reinstated.  In reviewing the sanctions order, the BAP said it was not permitted to consider documents and facts that were not before the bankruptcy court at or before the time it ruled. See Oyama v. Sheehan (In re Sheehan), 253 F.3d 507, 512 n.5 (9th Cir. 2001).

These materials were written by Thomas R. Phinney, currently a member of the Executive Committee of the Business Law Section, and liaison to the Insolvency Law Committee.  Editorial contributions were provided by ILC member Michael Good (mgood@southbaylawfirm.com) of South Bay Law Firm, in Torrance, California.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee

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