Contributed by Charlie Chen

“Whoever is careless with the truth in small matters cannot be trusted with important matters.”

– Albert Einstein

When does zealous representation cross the line and become subject to sanctions by the bankruptcy court? In most cases, attorneys are expected to aggressively advocate on behalf of their clients and are rewarded for doing so.  However, this objective should always be secondary to the practitioner’s ethical obligation and professional responsibility to state the existing law accurately and to carefully review pleadings to avoid the potential for misstatements of law or fact.  It is in this context that the First Circuit held in In re Hoover that the United States Bankruptcy Court for the District of Massachusetts did not abuse its discretion in sanctioning the debtor’s attorney after the First Circuit determined that the attorney misrepresented existing case law and the statutory definition of cash collateral under section 363(a). In support of its opinion, the First Circuit noted that the debtor’s attorney had previously been sanctioned on three separate occasions for asserting frivolous defenses, advancing arguments contrary to express statutory provisions, and filing a meritless motion for sanctions. Accordingly, the First Circuit affirmed the Bankruptcy Court’s order imposing non-monetary sanctions on the debtor’s attorney that required him to “enroll in and attend in person (not on-line) a one semester, minimum three credit-hour class on legal ethics or professional responsibility in an ABA accredited law school.”
In Hoover, the debtor’s attorney was a very experienced bankruptcy practitioner who regularly appeared before the Bankruptcy Court.  In the case at issue, he represented a debtor who sought chapter 11 relief due to, among other things, a lender’s pending foreclosure sale of certain business property and a significant tax obligation owed to the Massachusetts Department of Revenue.
Due to the debtor’s bankruptcy filing, the lender did not proceed with the foreclosure sale as previously scheduled. Instead, the lender continued the sale to a later date and sent the debtor’s attorney a written notice of the rescheduled date. The lender also indicated its intent to file a motion for relief from the automatic stay. Subsequently, the debtor’s attorney filed a motion seeking sanctions against the lender for alleged violations of the automatic stay. In the motion for sanctions, the debtor’s attorney argued that rescheduling the foreclosure sale constituted an improper continuation of debt collection activity under the automatic stay which warranted sanctions and a cancellation of the rescheduled sale. The debtor’s attorney made, among other things, the following misstatement of law in Paragraph 8 of the motion: “where a creditor has notice, continuation of a mortgage foreclosure sale post-petition, without obtaining relief from the automatic stay, is a willful violation.”  Moreover, in the same case, the debtor’s attorney filed an objection to the U.S. Trustee’s dismissal motion which misrepresented the statutory definition of cash collateral under section 363(a) of the Bankruptcy Code.  Specifically, contrary to the plain language of the statute, the debtor’s attorney asserted that cash collateral consisted only of “cash or other property that is subject to a consensual lien.”
Based on these misrepresentations, the Bankruptcy Court ordered the debtor’s attorney to show cause why he should not be sanctioned under Bankruptcy Rule 9011(b)(2). After reviewing the written response from the debtor’s attorney, the Bankruptcy Court rejected his arguments and ordered that he enroll in a class on legal ethics or professional responsibility. The Bankruptcy Court determined that the attorney made representations that were not a correct statement of the law and were not supported by the cases cited. In addition, after reviewing the statutory definition of cash collateral in its entirety, the Bankruptcy Court found that the debtor’s attorney had selectively quoted out of context only part of the definition and “quoting the statute in its entirety would have disproven his premise.” The Bankruptcy Court also concluded that the legal analysis submitted by the debtor’s attorney in support of his statutory interpretation of cash collateral was irrelevant and “absurd because the statute unambiguously states the opposite.”
First Circuit Affirmed the Bankruptcy Court’s Order Imposing Sanctions
Reviewing for abuse of discretion, the First Circuit affirmed the Bankruptcy Court’s decision. Turning first to the motion for sanctions filed by the debtor’s attorney, the First Circuit also concluded that Paragraph 8 of the motion was a “flat out misstatement” of the cases cited therein. To make its point clear, the First Circuit noted that “even now [debtor’s attorney] is unable to make any argument that the statement he made in Paragraph 8 is supported by the cases he cited.” Rejecting the defense raised by the debtor’s attorney that the inaccuracy disappears if Paragraph 8 is read in conjunction with other sections of the motion, the First Circuit found that the debtor’s representations of the case law were misleading, and, at best, unintelligible. Similarly, the First Circuit determined that the debtor’s attorney misrepresented the statutory definition of cash collateral by “materially mischaracterizing what the statute says, and by leaving out the most relevant, and to his argument, the most discrediting, portion of it.”
Emphasizing the need for bankruptcy courts to respond quickly in distressed situations, the First Circuit reiterated that bankruptcy courts should be able to assume that counsel’s representations are truthful. Even when lack of candor failed to deceive the bankruptcy court, disingenuous pleadings, such as the ones submitted by the debtor’s attorney, delay the court proceedings and impose costs on the other parties. The First Circuit concluded that the misleading assertions by the debtor’s attorney were not “merely erroneous detours made in pursuit of otherwise well-grounded filings,” but instead, constituted “artifice to provide illusory support for positions that were otherwise without an apparent basis.” Perhaps even more troubling was the observation that the debtor’s attorney had established a record of using his knowledge and skills for “improper purposes” before the Bankruptcy Court. Based on all these considerations, the First Circuit concluded that the Bankruptcy Court was well within its discretion in sanctioning such “excess of zeal.”
This case serves as a useful reminder that attorneys have an ethical obligation and professional responsibility to state the existing law accurately and to carefully review pleadings to avoid the potential for misstatements of law or fact. As we have discussed in our previous post, Aggressive Creditors: Go Overboard, And You May Find Yourself Walking the Plank, overzealous representation that runs afoul of the Bankruptcy Rules and code of professional responsibility can result in judicial reprimands, including sanctions.  Despite the intense pressure to prevail in the courtroom, it is imperative that attorneys resist the temptation to bend the truth to bolster their client’s position.  As noted by Austin O’Malley, the well-known author and professor of English literature, “those who think it is permissible to tell white lies soon grow color-blind.”  Such an insight is certainly the case here.