This website does not provide legal advice.  It is for informational purposes only. Please do not act or refrain from acting based on anything you read on this site. The information contained in this web site, article or link may be outdated, incorrect or not applicable; it is your obligation to confirm the accuracy. Using this site or communicating with Law Office of D.L. Drain, or any agent/employee of our firm, through this site does not form an attorney/client relationship. This site is legal advertising. Please review the full disclaimer for more information.

It is very important that you obtain legal advice from an experienced attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.

ATTORNEY SANCTIONS IN BANKRUPTCY

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

In re Busche, 2015 Bankr. LEXIS 3669 (Bankr. D.S.C. October 27, 2015) (Duncan, C.B.J.). Debtor’s attorney ordered to disgorge fees due to failure to investigate debtor’s finances and failure to attend first meeting of creditors.

In re Nguyen, 447 B.R. 268 (9th Cir. BAP 2001) “Margolis (attorney for debtors) argues that it was beyond the bankruptcy court’s authority to impose the “potentially onerous obligation to meet for at least an hour with a prospective debtor [which] goes well beyond the duties of a lawyer.” Furthermore, he contends that he cannot be held to guarantee debtors’ representations in the schedules and statements of financial affairs”  – BAP: “Here, Margolis’ testimony revealed his generally lax and hands-off approach to the accuracy of bankruptcy schedules and statements of financial affairs. The bankruptcy court was correct to be concerned with potential injury to the public resulting from these practices. Therefore, it enjoined Margolis from filing schedules unless an attorney conducted the initial client interview and spent at least an hour (emphasis added) with the debtor to make sure that assets and debts would be discovered and properly scheduled. Consistent with the bankruptcy court’s findings, the sanction was tailored to coerce Margolis into spending time with clients to ascertain a full picture of their financial history, assure the clients’ awareness of the importance of correctly completing bankruptcy documents, and to assure that Margolis has an adequate understanding of his clients’ needs. …”

In re D’Arata, 18-10524 (Bankr. S.D.N.Y. Aug. 3, 2018)  The debtor, living on $1,500 a month, needed eight months to pay the fee in installments – a fee of $900.  Raymond Ragues, the debtor’s attorney, did not attend the original creditors’ meeting. Instead, the attorney sent a so-called appearance counsel who was not an employee at the debtor’s attorney’s firm and “was not at all familiar with the debtor’s case.”  At the first creditors’ meeting, the debtor had said there were mistakes in his schedules. Among other things, the schedules said he had filed bankruptcy eight years earlier when he had not. The schedules listed student loans when there were none. At the second creditors’ meeting, the debtor said that his attorney had not amended the schedules correctly, according to Judge Lane “effectively left the debtor without representation at his meeting of creditors.”

Judge Lane encouraged the reporting of “any instances where a counsel is failing to meet his or her obligations to a debtor, including, filing documents without the signature or approval of the debtor, failing to personally appear with the debtor at a 341 meeting.”  Observing ethical problems such as the appearance counsel did not file 2016 statements disclosing the compensation they were to receive. The debtor’s retained attorney had failed to disclose fee-sharing arrangements with the appearance counsel, as required by Section 329(a).

Opinion Link

In Schwartz-Tallard v. America’s Servicing Co. 2012 DJDAR 9091 (2012), the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals decided a fee case under the so-called Sternberg bankruptcy doctrine. The doctrine was established under the Ninth Circuit’s decision in Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010). Under this doctrine, attorney fees incurred in pursuit of damages for the violation of the automatic bankruptcy stay are recoverable as an exception to the American Rule. That rule states that the parties to litigation are required to pay their own attorney fees.The debtor filed a Chapter 13 bankruptcy petition. The debtor made regular monthly mortgage payments, but the creditor asked for a lift of the stay, court granted the relief. Creditor sold home at foreclosure. Debtor proved payments current and court reinstated the automatic stay. The debtor moved for sanctions on the grounds that the creditor had violated the court’s stay order.The bankruptcy court granted the sanctions motion. In addition, the court awarded the debtor damages and attorney fees. When the creditor appealed, the district court concluded that there had been a violation of the automatic stay. The debtor then moved for additional attorney fees incurred during the defense of the appeal. The creditor contended such fees were prohibited under the decision in Sternberg v. Johnson, cited above. The district court denied the request for the recovery of fees incurred on the appeal. The case was then appealed to the Ninth Circuit’s Bankruptcy Appellate Panel. The Ninth Circuit reversed the denial of the fee award. The Ninth Circuit noted that under the Sternberg doctrine, a debtor’s attorney fees incurred in “pursuit of damages” for a stay violation cannot be awarded as compensation for actual damages. However, a debtor’s appellate attorney fees may be awarded as actual damages for a stay violation. The Ninth Circuit reasoned that the debtor was defending a damages award for the creditor’s stay violation, and fees were appropriate under those circumstances.


Mary Beth Mantiply v.Richard D. Horne, Case No. 16-16789 (11th Circuit, Dec. 5, 2017). When a person takes an action against an individual debtor in bankruptcy in violation of the automatic stay of Section 362(a) the debtor is entitled to recover damages under Section 362(k)(1) to include costs and attorneys’ fees. Question – are the fees awarded limited to those incurred in ending the stay violation, or do they also include the fees incurred in pursuing the damage award, including defending the award on appeal (in this case multiple appeals).

The 11th Circuit held, as a matter of first impression, that nothing in Section 362(k)(1) limits the scope of the attorneys’ fees to solely ending the stay violation. Instead, the broad language of the statute, permits recovery of fees incurred in stopping the stay, pursuing damages for the violation and defending the judgments on appeal.  Therefore, the initial award of fees and costs of $41,714 ballooned to $214,240.03.

Milavetz, Gallop & Milavetz, P.A. v. US, No. 08–1119 (U.S. Supreme Court, March 08, 2010)
In an action by a law firm seeking declaratory relief, arguing that plaintiff was not bound by the Bankruptcy Abuse Prevention and Consumer Protection Act’s (BAPCPA) debt relief agency provisions and therefore could freely advise clients to incur additional debt and need not make the requisite disclosures in its advertisements, the Eighth Circuit’s order rejecting the district court’s conclusion that attorneys are not “debt relief agencies” under BAPCPA, upholding application of BAPCPA’s disclosure requirements to attorneys, and finding BAPCPA section 526(a)(4) unconstitutional, is affirmed in part where: 1) attorneys who provided bankruptcy assistance to assisted persons were debt relief agencies under the BAPCPA; and 2) BAPCPA section 528’s requirements were reasonably related to the government’s interest in preventing consumer deception. However, the court of appeals’ order is reversed in part where BAPCPA section 526(a)(4) prohibited a debt relief agency only from advising a debtor to incur more debt because the debtor was filing for bankruptcy, rather than for a valid purpose.

Hersh v. U.S., 347 B.R. 19 (N.D.Tex. 2006) Godbey, District Judge DEBTORS’ ATTORNEYS ARE “DEBT RELIEF AGENCIES” UNDER 11 U.S.C. § 101(12A)

BAPCPA PROHIBITION AGAINST ATTORNEYS ADVISING CLIENTS TO INCUR NEW DEBT PRIOR TO FILING BANKRUPTCY IS UNCONSTITUTIONAL
BAPCPA REQUIREMENT THAT ATTORNEYS PROVIDE CERTAIN DISCLOSURES IS CONSTITUTIONAL § 101(12A), § 526(a)(4), § 527

Dallas attorney Susan B. Hersh filed this action to have certain portions of BAPCPA declared unconstitutional.

Held: The definition of debt relief agency at § 101(12A) lists 5 exceptions, none of which refers to attorneys. Had Congress meant to exclude attorneys from the category of debt relief agencies it would have been explicit in its list of exclusions. Hence, attorneys are debt relief agencies.

However, the provision found at § 526(a)(4) which states “A debt relief agency shall not … (4) advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title . . .” bans bankruptcy attorneys from advising their clients to take on additional debts ‘in contemplation’ of bankruptcy. Thus, section 526(a)(4) prevents lawyers from advising clients to take actions that are lawful, even under BAPCPA.”

The opinion gives examples of taking on more debt would be lawful, including refinancing a mortgage to get a lower interest rate, taking on secured debt such as a loan on an automobile that would survive bankruptcy and also enable to the debtor to continue with employment. “Thus, § 526(a)(4) prevents lawyers from giving their clients their best advice.” “Thus, section 526(a)(4) of the BAPCPA imposes limitations on speech beyond what is ‘narrow and necessary’” under a constitutional test.

Hersh also argued that § 527 violates the First Amendment. Held, Section 527 which requires the attorney to provide certain disclosures “advances a sufficiently compelling governmental interest and does not unduly burden either the attorney-client relationship or the ability of a client to seek bankruptcy.”

In re Thomas, 342 B.R. 758 (S.D.Tex. 2006) BAPCPA IMPOSES NEW ACCOUNTABILITY ON DEBTORS AND ATTORNEYS RULE 9011

BAPCPA imposes new responsibilities on debtors and their counsel for omitted and false data on schedules, and imposes on schedules the same standards as for other pleadings.

Debtor criticized for not informing her attorney of student loan lawsuit and attorney for student loan agency of her bankruptcy, and debtor’s attorney criticized for not making sufficient inquiry into debtor’s creditors to discover the lawsuit.In re Moser, 347 B.R. 471 (Bkrtcy.W.D.N.Y. 2006) CARL L. BUCKI, Bankruptcy Judge. ATTORNEY’S OVERSIGHT JUSTIFIED DEBTOR’S FAILURE TO FILE COPY OF TAX RETURN WITH TRUSTEE NO LATER THAN 7 DAYS BEFORE MOC § 521(e)(2)(A), 521(e)(2)(B)

The court held that the debtor’s attorney’s oversight in failing to file tax return with trustee was “circumstance beyond the control of the debtor, thus avoiding dismissal of case. The code provides that in the event of failure to file the return (or transcript of return) with the trustee as required shall result in the case being dismissed unless the debtor can persuade the court the failure was due to “circumstances beyond the control of the debtor.”

In this case the trustee did not receive the documents prior to the meeting of creditors. The debtor’s attorney attempted to present them at the meeting, but the trustee declined to accept them and subsequently moved to dismiss the case. The attorney testified that the debtors had given him the copies of the returns in a timely manner but that he neglected to file them with the trustee.

The court recited the rule that generally the acts of the attorney are imputed to the client. The court observed “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has created many new pitfalls for practitioners of bankruptcy law. Even excellent attorneys will encounter an enhanced risk for inadvertent delay.” The court cited in agreement the rulings in In re Grasso, 341 B.R. 821 (Bkrtcy.D.N.H. 2006) and In re Merrill, 340 B.R. 671 (Bkrtcy.D.N.H. 2006).

Briggs v. Reed (In re Reed), 17-1143 (8th Cir. April 25, 2018)  Judge Benton therefore held that the “bankruptcy court had authority to enter sanctions for events that occurred while trying to enforce the order compelling turnover and the show cause orders.”  The bankruptcy court sanctioned Ross H. Briggs for contempt of an order and 1 for misleading the court. The district court affirmed. Having jurisdiction under 28 2 U.S.C. §§ 158(d)(1) and 1291, this court affirms.

Bankruptcy judge has constitutional authority to sanction counsel for contempt for disobeying orders in the bankruptcy case. The bankruptcy judge ordered counsel under section 542(e) to provide information regarding his representation of numerous chapter 13 debtors to determine whether disgorgement under section 329 was required. Counsel made no sincere effort to comply. After notice and a hearing, the court sanctioned counsel for contempt, prohibiting him from filing any chapter 13 cases in the district for six months and requiring him to take 12 hours of ethics education. Under Article III, without the defendant’s consent, a bankruptcy court may not issue a final judgment against a defendant on a state-law claim or cause of action that is not resolved in ruling on the defendant’s proof of claim. Because the bankruptcy judge’s orders were issued under Bankruptcy Code provisions and related to actions in bankruptcy cases, the sanctions order was not based on a state law claim or cause of action but arose in the bankruptcy case. A bankruptcy judge has constitutional authority to issue such an order.

Discovery sanctions were not “payable to and for the benefit of a governmental unit”

Albert-Sheridan v. State Bar of California 19-60023, 9th Cir BAP 18-1222 (9th Cir Court of Appeals, June 10, 2020). The Ninth Circuit affirmed in part and reversed in part the Bankruptcy Appellate Panel’s affirmance of the bankruptcy court’s dismissal and remanded in a chapter 7 debtor’s adversary proceeding asserting that fees imposed by the State Bar of California on a member suspended for misconduct were dischargeable debts. Reversing in part, the panel held that the discovery sanctions under Cal. Civ. Proc. Code § 2023.030 were dischargeable because, under the plain test of 11 U.S.C. § 523(a)(7), they were not payable to and for the benefit of a governmental unit and were compensation for actual pecuniary losses. The Circuit affirmed as to the dismissal of the debtor’s claim that by failing to reinstate her law license, the State Bar violated § 525(a), which prohibits a government unit from denying, revoking, suspending or refusing to renew a debtor’s license solely because the debtor filed for bankruptcy or failed to pay a dischargeable debt.

WARNING: PRE-BAPCPA: Musser v. Provencher 28 Cal.4th 272 (2002) (12/26/02)

BANKRUPTCY ATTORNEY LIABLE FOR GIVING DIVORCE ATTORNEY ADVICE SHE COULD PROCEED WITH MOTION FOR SUPPORT WITHOUT RELIEF FROM AUTOMATIC STAY ON A CALIFORNIA COURT CASE AN ATTORNEY REPRESENTING THE WIFE IN A DIVORCE FILED A MOTION FOR SPOUSAL SUPPORT. BEFORE THE MOTION WAS HEARD IN STATE COURT THE HUSBAND FILED BANKRUPTCY. THE DIVORCE ATTORNEY CALLED A BANKRUPTCY LAWYER (NOT THE HUSBAND’S) TO FILE A MOTION FOR RELIEF FROM STAY ALLOWING THE HEARING ON SUPPORT TO PROCEED. THE BANKRUPTCY ATTORNEY ADVISED HER THAT SHE COULD PROCEED WITHOUT RELIEF FROM STAY, AS LONG AS THE SUPPORT ORDER WAS NOT MADE FINAL UNTIL RELIEF FROM STAY WAS GRANTED. DIVORCE ATTORNEY PROCEEDED WITH HEARING. DEBTOR SOUGHT DAMAGES AGAINST WIFE FOR VIOLATION OF THE STAY, WHO IN TURN SUED HER DIVORCE ATTORNEY FOR MALPRACTICE, WHO IN TURN SUED THE BANKRUPTCY ATTORNEY SHE HAD CONSULTED. BANKRUPTCY ATTORNEY WAS HELD LIABLE.