Summary
finding multiple, strategically timed bankruptcy filings can be a basis for inference of debtor's intent to hinder, delay, and defraud
Summary of this case from Vardan v. Wells Fargo BankOpinion
Case No. 07-33312-KRH.
January 18, 2008
MEMORANDUM OPINION
Jessica Ashley Johnson (the "Debtor") was 18 years old when she filed this Chapter 13 bankruptcy case on September 12, 2007 (the "Petition Date"). She had just graduated from high school three months prior to the Petition Date. She was still a full time student. Jessica Ashley Johnson did not file bankruptcy to obtain relief from her creditors. She did not have sufficient time to incur significant debt. Rather, the Debtor's grandmother and the Debtor's father used this teenager as part of a scheme to hinder, delay and defraud their own creditors. They did this by transferring to the Debtor certain real property on the eve of a foreclosure sale and then by having her file for bankruptcy.
Included in the schedules annexed to the Debtor's bankruptcy petition were two parcels of real property located on 4th Avenue in the City of Richmond, VA, one at 2202 4th Avenue (the "2202 Property") and the other at 3309 4th Avenue (the "3309 Property," and together with the 2202 Property, the "Two Parcels of Real Property"). The Two Parcels of Real Property had been owned jointly by the Debtor's grandmother and the Debtor's father. The 3309 Property had been conveyed to the Debtor by her grandmother and her father by deed of gift recorded just eight days prior to the Petition Date.
Peter P. Balas ("Balas") held a note secured by a deed of trust on the 3309 Property. The Debtor's bankruptcy petition was filed for the purpose of forestalling a foreclosure sale that was scheduled for September 13, 2007 on the 3309 Property. Balas filed a motion in this Court for in rem relief from the automatic stay (the "Motion") pursuant to § 362(d)(4) of the Bankruptcy Code. Section 362(d)(4) authorizes courts to grant a creditor with a loan secured by real property relief from the automatic stay created by § 362(a) of the Bankruptcy Code as to that real property if that property has been transferred or if multiple bankruptcies have been filed as "part of a scheme to delay, hinder, and defraud creditors." On November 28, 2007, the Court held a hearing (the "Hearing") on the Motion. Debtor's counsel appeared at the Hearing but did not offer a defense to the Motion. The Court granted the Motion finding that the 3309 Property had been transferred to the Debtor on the eve of a foreclosure sale for the sole purpose of allowing the Debtor to file bankruptcy. The Court also found that the 3309 Property had been tied up previously in multiple bankruptcies serially commenced by the Debtor's grandmother and by the Debtor's father. Between them, the Debtor's grandmother, Dorothy Mayo Johnson ("Ms. Johnson"), and the Debtor's father, Joseph Allen Johnson ("Mr. Johnson"), have been debtors in 12 separate bankruptcy cases involving these Two Parcels of Real Property. Once Ms. Johnson and Mr. Johnson discovered that they could no longer obtain the benefit of an automatic stay by further bankruptcy filings, they transferred the 3309 Property to the Debtor and had the Debtor file this bankruptcy case.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") added a new provision to the Bankruptcy Code providing that where a debtor has been a debtor in a previous bankruptcy that was dismissed within one year of the filing of the new case, the automatic stay of § 362(a) terminates as to the Debtor on the 30th day following the new filing unless within that 30 days the debtor seeks an extension of the stay and the court grants the extension within the 30-day period. In order to obtain an extension of the stay, the debtor must prove that the filing of the new case was in good faith as to the creditors that would be affected by the stay. 11 U.S.C. § 362(c)(3)(B).
At the Hearing the Court became aware of the involvement of Debtor's counsel, Andrew George Adams, III ("Adams"), in the scheme to hinder, delay and defraud Balas. Adams had represented Ms. Johnson and Mr. Johnson in three of the later serial bankruptcy filings that were part of the scheme to hinder, delay and defraud Balas. The Court also learned that Adams was counsel of record for Ms. Johnson in a fourth bankruptcy case that was pending before this Court (Case No. 07-32620-KRH).
After the Hearing, the Court issued an order for Mr. Adams to show cause why the filing of the Debtor's bankruptcy case "was not presented for an improper purpose as proscribed by Rule 9011(b) of the Federal Rules of Bankruptcy Procedure and if he cannot show such cause, why he should not be sanctioned for filing this bankruptcy case" (the "Order to Show Cause").
On December 6, 2007, the Court conducted a hearing (the "Sanctions Hearing") on the Order to Show Cause. The Court also heard two Objections to the Debtor's plan that had been filed by the Chapter 13 Trustee and Balas. As the Debtor was an unemployed, full-time student, she had no income with which to fund a plan. Based upon the evidence presented, the Court sustained both Objections to confirmation of the Debtor's Chapter 13 plan.
At the Sanctions Hearing, the office of the U.S. Trustee presented evidence (i) regarding the prior bankruptcy cases of Ms. Johnson and Mr. Johnson, (ii) regarding the transfers of the Two Parcels of Real Property to the Debtor, and (iii) regarding Adams's involvement in three of the prior bankruptcy cases of Ms. Johnson and Mr. Johnson and Ms. Johnson's pending bankruptcy case. Adams appeared on his own behalf.
Mr. and Ms. Johnson acquired the 2202 Property jointly on December 6, 2001. Mr. and Ms. Johnson used the 2202 Property as rental property. On December 3, 2001, Mr. Johnson filed his third bankruptcy case (Case No. 01-62132-DOT). He did not disclose to the Court his purchase of the 2202 Property while his bankruptcy case was pending. That case was dismissed on June 10, 2002 on Mr. Johnson's motion. Two days later Mr. Johnson filed another bankruptcy case (Case. No. 02-65021-DOT). In that case, Mr. Johnson disclosed his ownership interest in the 2202 Property. Less than one month after that, Ms. Johnson filed her second bankruptcy case (Case No. 02-65638-DOT). That case was dismissed on February 14, 2003 for failure to make plan payments. Less than two weeks later, on February 26, 2003, Ms. Johnson filed another bankruptcy case (Case No. 03-31907-DOT). While that case was pending, Mr. Johnson's case (Case No. 02-65021-DOT) was dismissed on August 25, 2003 for failure to make plan payments.
Neither the Debtor, Mr. Johnson nor Ms. Johnson used either of the Two Parcels of Real Property as their residence. The Two Parcels of Real Property were used exclusively for business purposes.
Mr. Johnson filed another bankruptcy case on September 8, 2003 (Case No. 03-38679-DOT). This case was converted to a case under chapter 7 of the Bankruptcy Code, and Mr. Johnson received a discharge. While Mr. Johnson's chapter 7 case was pending, Ms. Johnson's bankruptcy case (Case No. 03-31907-DOT) was dismissed on May 24, 2004 for failure to make plan payments. On June 8, 2004, less than three weeks later, Ms. Johnson filed her fourth bankruptcy case (Case No. 04-35567-DOT). In this case, she disclosed her ownership interest in the 2202 Property. This case was dismissed on March 4, 2005 because of Ms. Johnson's failure to make plan payments.
On April 20, 2005, Ms. Johnson filed another bankruptcy case (Case No. 05-33693-DOT). While that case was pending, Mr. and Ms. Johnson acquired the 3309 Property in August of 2005. They titled the property in both of their names. Ms. Johnson did not receive Court approval for the purchase. Mr. and Ms. Johnson did not reside in the 3309 Property. It also was rental property. Judge Tice dismissed Ms. Johnson's pending bankruptcy case (Case No. 05-33693-DOT) with prejudice for a period of 180 days in a hearing held on October 12, 2005. The Court's order dismissing the case with prejudice was entered on October 19, 2005.
See note 2 supra.
Between the time of Judge Tice's ruling dismissing Ms. Johnson's case and the entry of the Court's order commemorating that ruling, Adams hurriedly filed yet another bankruptcy case for Ms. Johnson on October 15, 2005 (Case No. 05-42416-DOT). This case was filed in complete derogation of the Court's ruling three days earlier. The case was subsequently dismissed on October 27, 2005, again with prejudice.
Mr. Johnson then filed for bankruptcy on January 20, 2006 (Case No. 06-30117-DOT). Adams represented Mr. Johnson in that case. Although Mr. Johnson listed the 2202 Property in his schedules, he failed to disclose his ownership interest in the 3309 Property. Mr. Johnson's case was dismissed on July 28, 2006 for failure to make plan payments. Mr. and Ms. Johnson each filed for bankruptcy in September 2006 (Case Nos. 06-32344-DOT and 06-32456-KRH). Adams represented Mr. Johnson in his case. Adams listed Mr. Johnson's ownership interest in both the 3309 Property and the 2202 Property in his bankruptcy schedules. In her bankruptcy case, Ms. Johnson did not list her interest in the 3309 Property but did disclose her interest in the 2202 Property. Ms. Johnson moved for imposition of the automatic stay pursuant to 11 U.S.C. § 362(c)(4), but the Court denied that motion.
In February 2007, while both Mr. and Ms. Johnson had bankruptcy cases pending, they transferred their interest in the 2202 Property to a trust for the benefit of the Debtor. Mr. Johnson was the trustee of the trust. Mr. Johnson testified that he knew that the Bankruptcy Code required them as debtors to seek court approval for such a transfer, however neither he nor Ms. Johnson sought court approval. On March 23, 2007, the 2202 Property was transferred once again — this time from the trust to the Debtor.
On May 11, 2007, the Court dismissed Ms. Johnson's case (Case No. 06-32456-KRH) for failure to make plan payments. Thirteen days later, the Court dismissed Mr. Johnson's case for that same reason (Case No. 06-32344-DOT). Adams represented Ms. Johnson in her most recent bankruptcy case, filed on July 19, 2007 (Case No. 07-32620-KRH). Adams did not list Ms. Johnson's ownership interest in the 3309 Property or the 2202 Property in her schedules. At the Sanctions Hearing, Ms. Johnson testified that she had not listed the 3309 Property in her bankruptcy because she had transferred the Property to the Debtor.
The transfer of the 3309 Property occurred after Ms. Johnson's bankruptcy petition was filed and the 3309 Property should have been listed in Ms. Johnson's schedules.
Balas scheduled the foreclosure sale for the 3309 Property on September 13, 2007. Mr. and Ms. Johnson had not made a payment on the note secured by the deed of trust since April of 2006. They had successfully avoided doing so through their serial bankruptcy filings. Meanwhile, they enjoyed the rents generated by the 3309 Property which were converted to their own use in violation of the assignment of rents clause contained in the deed of trust. It was in a desperate attempt to keep the 3309 Property that Mr. and Ms. Johnson executed the deed of gift conveying the 3309 Property to the Debtor. The deed of gift dated June 7, 2007 was recorded September 4, 2007. The transfer occurred while Ms. Johnson's current bankruptcy case was pending (Case No. 07-32620). Adams did not seek Court approval on behalf of Ms. Johnson for the transfer. Adams did not list the transfer of the property in Ms. Johnson's Statement of Financial Affairs.
Mr. Johnson brought his daughter to meet with Adams on September 7, 2007. Adams agreed that the best way to stop the scheduled foreclosure sale was for Mr. Johnson's daughter to file a chapter 13 bankruptcy petition quickly. Adams insisted at the Sanctions Hearing that he had conducted a review of the Debtor's financial situation. Adams admitted that he learned from this review that the Debtor had no bank account. He learned about the Debtor's age. He also learned that the Debtor was unemployed. Adams found out that the Debtor had no wage statements for the six months prior to filing, as the Debtor was a full-time student. The Debtor had never filed a tax return. Adams knew that the Debtor had just recently acquired both the 3309 Property and the 2202 Property from Ms. Johnson and Mr. Johnson by way of gift. Adams already was aware of the prior bankruptcy filings of Mr. Johnson and Ms. Johnson and was familiar with their financial affairs from his prior representation of them.
Adams became aware that the Debtor's primary assets, other than the Two Parcels of Real Property that had just been transferred into her name, were her schoolbooks, school supplies, clothes, electronics, and a computer. The Debtor had no other substantial assets and claimed no other property exempt under Schedule C. Adams did not bother to review the rent rolls for either of the properties for the six months prior to filing. That was because Adams was confident that the Debtor was not collecting the rents on the Two Parcels of Real Property. He assumed that Mr. Johnson was collecting those rents. Adams did not review the deeds of trust or the notes secured by those deeds of trust for either of the Two Parcels of Real Property. Adams feigned that he was ignorant of the fact that the Debtor was not personally liable on the two deed of trust notes. Adams admitted that the sole purpose for putting the Debtor into bankruptcy was to avoid foreclosure on the 3309 Property. Adams admitted that he never counseled the Debtor against filing for bankruptcy, nor did he ever suggest to her that filing a bankruptcy petition might be ill-advised.
It is a fundamental tenant of commercial law that one does not become personally liable on debt that encumbers property by virtue of becoming an owner of the property.
The federal courts should hold attorneys that appear before them to the recognized standards of conduct in their jurisdiction. In re Computer Dynamics, Inc. 252 B.R. 50, 64 (Bankr. E.D. Va. 1997), aff'd, No. 98-1793, 1999 WL 350943 (4th Cir. June 1, 1999). Rule 2090-1(I) of the Local Rules of Bankruptcy Procedure provides that the ethical rules applicable to this Court are the Virginia Rules of Professional Conduct. Violations of the Virginia Rules of Professional Conduct may lead to the imposition of sanctions. Computer Dynamics, 252 B.R. at 64. The Court finds that Adams has violated certain of these rules. In so doing, he has failed to adhere to the minimum standard of acceptable conduct for a lawyer practicing before this Court.
Rule 1.4(b) of the Virginia Rules of Professional Conduct requires an attorney to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." Comment 3 specifies that normally an attorney need only provide information "appropriate for a client who is a comprehending and responsible adult. . . . However, fully informing the client according to this standard may be impracticable, for example, where the client is a child or suffers from mental disability. See Rule 1.14." Rule 2.1 of the Virginia Rules of Professional Conduct requires an attorney to "exercise independent professional judgment and render candid advice" to clients. Comment 3 to that Rule states that even though a client may ask for "purely technical advice" if that client is "inexperienced in legal matters . . . the lawyer's responsibility as advisor may include indicating that more may be involved than strictly legal considerations." "As advisor, a lawyer provides a client with an informed understanding of the client's legal rights and obligations and explains their practical implications." Virginia Rules of Prof'l Conduct, Preamble ¶ 1 (2001), Va. Sup. Ct. R. Pt. 6, § II. Comment 5 to Rule 2.1 notes that "when a lawyer knows that a client proposes a course of action that is likely to result in substantial adverse legal, moral or ethical consequences to the client or to others, duty to the client under Rule 1.4 may require that the lawyer act if the client's course of action is related to the representation."
The use of the word "may" means that this action is not required for an attorney's compliance with the Virginia Rules of Professional Conduct. Virginia Rules of Prof'l Conduct, Preamble ¶ 13 (2001), Va. Sup. Ct. R. Pt. 6, § II. The Court also notes that the comments to the Rules of Professional Conduct that are cited throughout this opinion "do not add obligations to the Rules but provide guidance for practicing in compliance with the Rules." Rules of Prof'l Conduct, Preamble ¶ 13 (2001), Va. Sup. Ct. R. Pt. 6, § II.
The Debtor in this case was unsophisticated as to financial affairs. She had no bank account and no employment. She had never filed a tax return. She was barely out of high school. In spite of this, Adams failed to advise her against filing for bankruptcy despite the fact that she had no substantial debt. He could not have advised her that she was not personally liable on the deeds of trust, as Adams himself claims that he was unaware of that fact. He also allowed her to become a participant in a scheme to hinder, delay and defraud creditors of her father and her grandmother without advising her that there was a substantial likelihood that this would occur if she filed.
Rule 1.3(c) of the Virginia Rules of Professional Conduct prohibits an attorney from intentionally prejudicing or damaging "a client during the course of the professional relationship." Comment 1 to that rule emphasizes that "[a] lawyer should act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client's behalf." By putting this Debtor into a bankruptcy that was timed to postpone an inevitable foreclosure sale, Adams caused catastrophic and irreversible damage to his client's credit record. Starting off in life, this teenager's credit report will now reflect this bankruptcy for years to come. 15 U.S.C. § 1681(a)(1). The bankruptcy filing may prevent the Debtor from purchasing or renting a home. It may keep her from acquiring a vehicle. Knowing that the gambit to frustrate the foreclosure sale faced a likely challenge for in rem relief due to the recent amendments to the Bankruptcy Code, Adams, nevertheless, subjected this unsophisticated Debtor to that risk. Then, when the expected motion was filed charging that his client was involved in a scheme to hinder, delay, and defraud creditors, Adams provided no defense to the very serious allegations on the Debtor's behalf.
BAPCPA added new § 362(d)(4) to the Bankruptcy Code in 2005.
Rule 1.7(a) of the Virginia Rules of Professional Conduct prohibits an attorney from representing a client if "there is significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer." It is painfully obvious to this Court that in representing the Debtor, Adams was not acting in her best interests, but rather he was serving the interests of her father and her grandmother. No reasonable attorney could maintain that filing for bankruptcy was in the best interests of this teenager. The Debtor had no substantial debt. Yet, Adams chose to represent the Debtor when there was a significant risk that the actions he would take during the course of that representation would benefit clients Mr. and Ms. Johnson rather than the Debtor, his client in this case. Adams was representing the interests of Mr. and Ms. Johnson, not the Debtor, in violation of Rule 1.7(a) and 1.3(c) of the Virginia Rules of Professional Conduct.
Rule 9011(a) of the Federal Rules of Bankruptcy Procedure requires the attorney of record to sign the client's bankruptcy petition in the attorney's individual name. Through this signature, the attorney certifies that the signed document:
1) . . . is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.
Adams may be held "liable for sanctionable conduct engaged in by counsel on the party's behalf if" he "knew or should have known that" the "conduct in the case was improper." Cal. Fed. Bank, FSB v. Douglas (In re Douglas), 141 B.R. 252, 256 (Bankr. N.D. Ga. 1992). Adams signed the Debtor's bankruptcy petition in this case. Signing a petition filed for the improper purpose of furthering a scheme to hinder, delay, and defraud a creditor is sanctionable misconduct. In re Computer Dynamics, Inc. 252 B.R. at 64 (holding that an attorney improperly signing pleadings filed with the court is sanctionable misconduct).
The list in Rule 9011(b)(1) of improper purposes for which a document may be presented is nonexclusive. Fed.R.Bankr.P. 9011(b)(1) ("[the signed document] is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation"); In re Computer Dynamics, 252 B.R. 50, 57 (Bankr. E.D. Va. 1997). Whether a document is filed for an improper purpose is an objective standard. Hardee v. Mitchell, No. 96-1968, 1998 WL 766699, at *4 (4th Cir. Oct. 20, 1998); In re Computer Dynamics, 252 B.R. at 57. "In applying the objective test, courts may infer the purpose of a filing from the consequences of the pleading or motion." 10 Collier on Bankruptcy ¶ 9011.04[8][c] (Lawrence P. King ed., 15th ed. rev 2007). "[T]he court must derive the signer's purposes from objective evidence of the signer's motive in filing the document. The court may consider circumstantial facts that surround the filing as evidence of the signer's purpose. Baseless allegations also indicate an improper purpose." In re Weiss, 111 F.3d 1159, 1171 (4th Cir. 1997), cert. denied, 522 U.S. 950 (1997) (citations omitted). A document is filed for an improper purpose if it is not filed to vindicate a party's legal rights. Roberson Def. Comm. v. Britt (In re Kunstler), 914 F.2d 505, 518 (4th Cir. 1990), cert. denied, 499 U.S. 969 (1991). "Case law clearly establishes that imposition of sanctions is appropriate when a bankruptcy petition is not filed for legitimate, rehabilitative purposes, and the sole purpose for the filing is to delay foreclosure." Cal. Fed. Bank, 141 B.R. at 256 (citations omitted); In re Grigsby, 233 B.R. 558 (Bankr. S.D. Fla. 1999) (sanctioning a debtor and his counsel when there were serial bankruptcy filings by the debtor and his wife in which no feasible plan was proposed).
The Court finds that Adams was a willing and active participant in the scheme to hinder, delay and defraud Balas and holds that his signature on the Debtor's petition furthered that scheme. In determining that Adams's involvement in these matters was not superficial, the Court has relied upon the evidence surrounding the filing. Based upon an objective review of this evidence, the Court finds that these events did not transpire due to inadvertent oversight or from a failure to properly investigate. Adams took advantage of the Debtor's lack of sophistication. Adams was involved in four of the prior bankruptcies filed by Mr. Johnson and Ms. Johnson. He was familiar with the serial filing history. From his representation of Mr. and Ms. Johnson in their previous bankruptcy cases, Adams was familiar with the 2202 Property and 3309 Property. Although he did not admit as much at the Sanctions Hearing, through this past involvement with Mr. Johnson and Ms. Johnson, Adams had to become aware of their motives. He never met with the Debtor without her father being present. Adams knew that the bankruptcy filing was being orchestrated solely for the purpose of avoiding foreclosure of the 3309 Property. Like all of the previous bankruptcies that had been filed by Mr. Johnson and Ms. Johnson, the purpose for putting the Debtor into bankruptcy was not to reorganize her debts so that she could repay them. The Court so finds by looking at the Debtor's lack of income independent of the Two Parcels of Real Property and lack of substantial debt. Mr. Johnson admitted that he wanted to delay the foreclosure. Based upon Mr. Johnson's behavior in the past bankruptcy filings, it is clear that he wanted to continue to collect the rental income from the 3309 Property as long as possible. Adams was not only aware of this scheme to hinder, delay and defraud Balas, he helped to perpetuate it by allowing the Debtor to become part of that scheme. Based upon objective evidence of Adams's purposes in filing the bankruptcy, it is apparent that Adams became a willing and knowing participant in the scheme.
Adams put the Debtor, a teenage girl, into bankruptcy shortly after the 3309 Property had been transferred into her name for the sole purpose of delaying an impending foreclosure. No reasonable attorney would engage in such action. A reasonable attorney would not participate in a scheme to hinder, delay and defraud creditors. More importantly, a reasonable attorney would realize that this petition would not result in a successful reorganization. The Debtor had neither income nor debt. Adams allowed a teenager to be used by her father and her grandmother as the pawn in a desperate gambit to further delay the inevitable foreclosure of a piece of rental property. The Court holds that Adams filed the Debtor's bankruptcy petition for an improper purpose in violation of Bankruptcy Rule 9011.
It is important to note that there is nothing wrong with a debtor filing a Chapter 13 bankruptcy petition to stop a foreclosure sale. What motivates the commencement of many, if not most, bankruptcy cases is the desire to stop a foreclosure on the Debtor's home. What differentiates this case from all of the others is the complete absence of any commitment to a plan of reorganization. Based on the totality of the circumstances presented in this case, there was clearly no reason to file the bankruptcy petition other than to implement a scheme to delay, hinder and defraud a creditor.
Several of the United States Courts of Appeals have held that an improper purpose is not enough for a court to levy sanctions if the document is otherwise well-grounded in fact and law. See Sussman v. Bank of Israel, 56 F.3d 450 (2d Cir.), cert. denied, 516 U.S. 916 (1995); National Ass'n of Gov't Employees v. National Fed'n of Fed. Employees, 844 F.2d 216 (5th Cir. 1988). The Fourth Circuit Court of Appeals does not appear to have resolved this issue. In re Computer Dynamics Inc., No. 98-1793, 1999 WL 350943 (4th Cir. June 1, 1999) (affirming a district court decision that affirmed a bankruptcy court's decision to levy sanctions on counsel who filed a document well-grounded in fact and law but for an improper purpose); Roberson, 914 F.2d at 518 ("Since we have affirmed the court's findings that the complaint in the instant case was not well grounded in law or in fact, we need not decide whether a complaint which is well grounded in law and in fact can be sanctioned solely on the basis that it was filed for an improper purpose."). Carlton v. Franklin, 1990 WL 116788, at *6-*9 (4th Cir. Aug. 2, 1990) ( per curiam) (describing a district court decision as "well reasoned," which held that an improper purpose alone was not sufficient for a court to levy sanctions based on a document that is well grounded in law and fact).
While this Court agrees with In re Computer Dynamics, it need not address this issue. That is because the Debtor's petition did not assert a claim "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." Fed.R.Bankr.P. 9011(b)(2). This is an objective standard. See Roberson, 914 F.2d at 514, 516-17; Cox v. Saunders (In re Sargent), 136 F.3d 349, 352 (4th Cir. 1998), cert. denied, 525 U.S. 854 (1998). In this case, the Debtor had virtually no debt on which she was personally liable; and, therefore, the petition was not filed with the intention of reorganizing her debts. The Debtor was unemployed and had no independent source of income. Therefore, the Debtor lacked the capacity to fund a plan. The petition was not filed to reorganize the debts or to administer the assets of the Debtor. The Debtor's petition was filed as another means for the Debtor's father and her grandmother to attempt to reorganize their own debts — a venture at which they had failed on fifteen prior occasions. Thus, the Debtor's petition was not well grounded in law or fact.
The United States Court of Appeals for the Fourth Circuit has suggested that courts first consider whether a document is well grounded in fact and law before determining whether that document was filed for an improper purpose. Roberson, 914 F.2d at 518. This Court has discussed the lack of legal support for the Debtor's petition in its "improper purpose" analysis.
Having found that Adams engaged in sanctionable conduct by violating the Virginia Rules of Professional Conduct and Rule 9011, the Court turns next to the determination of the proper sanction. Rule 9011(c) sets forth the sanctions courts can impose for violation of the Rule. Rule 9011(c)(2) notes that the sanction should "be limited to what is sufficient to deter repetition of such [violative] conduct or comparable conduct by others similarly situated." Courts have "wide latitude in imposing sanctions to include non-monetary or monetary penalties." In re Wenk, 296 B.R. 719, 728 (Bankr. E.D. Va. 2002).
The Court may consider precedent established under Rule 11 of the Federal Rules of Civil Procedure in interpreting Bankruptcy Rule 9011. Computer Dynamics, 252 B.R. at 55. The Advisory Committee Notes for Rule 11 list the following factors for courts to consider in determining the appropriate sanction: "Whether the improper conduct was willful, or negligent; whether it was part of a pattern of activity, or an isolated event; whether it infected the entire pleading, or only one particular count or defense; whether the person has engaged in similar conduct in other litigation; whether it was intended to injure; what effect it had on the litigation process in time or expense; whether the responsible person is trained in the law; what amount, given the financial resources of the responsible person, is needed to deter that person from repetition in the same case; what amount is needed to deter similar activity by other litigants." 1993 Advisory Committee Note to Fed.R.Civ.P. 11.
Adams's behavior was willful, not negligent. He filed this petition to further a scheme in which he was an active, willing participant. Adams's behavior caused harm that was not unintended. Filing the bankruptcy petition caused Balas to incur attorney's fees by having to file and prosecute (i) a motion for relief from the automatic stay imposed by § 362(a) and (ii) an objection to the Debtor's Chapter 13 plan. The petition delayed Balas from foreclosing on the 3309 Property by almost two months. Filing the petition has significantly impaired this teenage Debtor's credit history.
The Court may consider whether Adams's past behavior is part of a pattern of conduct in determining what sanctions are appropriate to deter future conduct. Smith v. City of Oakland, (In re Brooks-Hamilton), 329 B.R. 270, 284-85, 290 (B.A.P. 9th Cir. 2005). This Court has had to issue orders for Adams to show cause on several prior occasions. This Court recently has had to issue an order for Adams to show cause why he had not pursued the dismissal of a bankruptcy case that he filed "inadvertently" (Case No. 06-33278-KRH). The Court in another recent case issued an order for Adams to show cause why he had failed to comply timely with deadlines established by the Court (Case No. 07-31932-KRH). This second matter has been continued several times at the suggestion of the Office of the U.S. Trustee in order to allow Adams time to complete Continuing Legal Education courses offered by the Virginia State Bar and to undergo a small practice audit offered by the Virginia State Bar in the hope of improving Adams's practice. Based upon Adams's transgressions in this case, it is apparent that his practice and conduct are still not at the minimum level required to practice before this Court.
Applying the foregoing factors, this Court has determined that suspending Mr. Adams from filing bankruptcy cases in this Court for a period of not less than 120 days is an appropriate sanction. Suspension of an attorney from practice before a court is a harsh sanction, but it is one available for Rule 9011 violations. Smith, 329 B.R. at 287, 290-91. Mr. Adams has a history of failing to adhere to the standards and principles that this Court expects attorneys to follow. Here he has abused his position as an officer of the Court by participating in a scheme to hinder, delay and defraud creditors. "A lawyer should use the law's procedures only for legitimate purposes and not to harass or intimidate others." Virginia Rules of Prof'l Conduct, Preamble ¶ 4 (2001), Va. Sup. Ct. R. Pt. 6, § II.
Adams manipulated the bankruptcy laws to improperly hinder the ability of Balas to enforce his legal rights. In so doing, Adams violated a fundamental principle behind the attorney-client relationship, the zealous representation of one's client. Instead of providing such representation, Adams needlessly ruined the credit record of his client. Adams pursued this course at the expense of one client in order to further the cause of another of his clients. In order to provide Adams with the additional resources to understand the attorney-client relationship, the Court has determined that (i) compelling Adams to complete not less than 17 hours of Continuing Legal Education under the supervision of and satisfactory to the Office of the United States Trustee and (ii) requiring Adams to undergo the small practice audit offered by the Virginia State Bar before he be allowed again to practice before this Court are appropriate additional sanctions.
Finally, the Court has determined that the disgorgement of the attorney's fees that Adams charged the Debtor is an appropriate sanction in this case.
A separate Order shall issue.