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Vol 14, Num 4 l November 2016

Ethics and Professional Compensation

► In This Issue:

Sanctions Upheld for Bad-Faith Delay and Improper Purpose

ABI

Jeffrey Coe
Mesch Clark Rothschild, P.C.
Tucson, Ariz.

Recently, in In re Frantz, the U.S. District Court for the District of Idaho affirmed the bankruptcy court’s assessment of $49,477.46 in sanctions against the debtors and their attorney for improper litigation tactics. The court held that evidence that the debtors delayed filing motions to disqualify Idaho Independent Bank’s (IIB’s) counsel and expert witnesses until shortly before trial was sufficient to support a finding of bad faith. Additionally, the court held that the debtors’ use of the disqualification motions to “vet a malpractice suit against [IIB counsel] in the hopes of manipulating a settlement with IIB [was] alone sufficient to support the Bankruptcy Court’s finding of bad faith.”
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Bankruptcy Attorney Sanctioned for Docusigning Debtor’s Signature to Documents Filed with the Court

ABI

Keith L. Kleinman
Cozen O’Connor
Wilmington, Del.

Electronic signature software, such as DocuSign, is increasingly accepted in commercial transactions as an enforceable means of signing contracts and other agreements. However, in a recent decision by the U.S. Bankruptcy Court for the Eastern District of California, In re Mayfield, the court sanctioned a bankruptcy attorney who had his client DocuSign his bankruptcy petition, schedules and other related bankruptcy documents filed with the court because such signatures are not original signatures as required by bankruptcy rules. In so holding, the court definitively determined that bankruptcy petitions and related documents signed by debtors and filed with the court should be signed in ink and retained by the attorney representing the debtor so that they can be made available for inspection upon demand in accordance with court rules.
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U.S. District Court Has Subject-Matter Jurisdiction over Attorney Malpractice Claim Stemming from Services Provided in Bankruptcy Case

ABI

Jennifer Larkin Kneeland
Linowes and Blocher LLP
Bethesda, Md.

On Aug. 30, 2016, in Roberts Broadcasting v. McKitrick, the U.S. District Court for the Eastern District of Missouri (Eastern Division) decided that a legal malpractice claim against bankruptcy counsel based on services rendered in the bankruptcy case “arises in” a case under the Bankruptcy Code. By concluding that the malpractice claim arose in a case under the Code, the district court determined that it had federal subject-matter jurisdiction over the case pursuant to 28 U.S.C. § 1334(b). The district court then referred the case to the U.S. Bankruptcy Court for the Eastern District of Missouri (Eastern Division) for further adjudication in accordance with the district court’s Local Rule 9.01(B)(1) referring bankruptcy cases to the bankruptcy court.
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Attorneys’ Fees Alone — Without Actual Damages or Ongoing Stay Violation — Do Not Warrant Sanctions for Violations of the Automatic Stay

ABI

Graham Mitchell
Nelson Mullins Riley & Scarborough LLP
Columbia, S.C.

ABI

Gregory M. Taube
Nelson Mullins Riley & Scarborough LLP
Atlanta

A debtor cannot recover sanctions or attorneys’ fees under 11 U.S.C. § 362(k) when the debtor admits to having suffered no actual damages and the filing of a motion for sanctions was not necessary to remedy a stay violation. Denying the debtor’s motion for sanctions, the U.S. Bankruptcy Court for the Western District of New York reached this conclusion and, in its opinion, colorfully addressed the potential for encouraging wasteful litigation that would arise from a contrary conclusion.

Background

The debtor, whose case started “quite unremarkably,” according to the court, argued in the motion that the creditor violated the automatic stay by sending written collection letters to the debtor and by repossessing the debtor’s vehicle post-petition. However, the motion, filed shortly after the repossession, did not seek the return of the vehicle and did not seek to end an ongoing stay violation. Debtor’s counsel also conceded that the motion did not allege any actual damage or pecuniary loss because the debtor suffered none. Instead, the motion only sought recovery of the attorneys’ fees associated with the motion itself, which, according to debtor’s counsel, was brought “so as to protect the honor and sanctity of the automatic stay.” In response to this position, the court, quoting Charles Dickens, opined that perhaps the motion provided “a modern day illustration of the reason for a long-held view of some skeptics” that “[t]he one great principle of the English law is[] to make business for itself.”
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