Bankruptcy Attorneys Potentially Face Sanctions for Failure to Reasonably Investigate the Accuracy of Bankruptcy Petitions Prior to Filing
By: Nancy Bello
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in In re Parikh,[i] a bankruptcy court imposed sanctions pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure against a debtor’s attorney who signed a chapter 7 petition that contained incomplete and incorrect information that was clearly refuted by the debtor’s previous chapter 13 petition.[ii] In Parikh, the debtor initially filed under chapter 13 of the Bankruptcy Code.[iii] Subsequently, the debtor’s chapter 13 case was dismissed for the debtor’s failure to produce documents.[iv] The debtor then filed a second bankruptcy case under chapter 7 of the Bankruptcy Code in order to stop a judgment creditor’s enforcement action in state court.[v] Although the debtor’s chapter 7 attorney could access the chapter 13 petition and schedules on PACER, there were several discrepancies between the information provided in the petition and schedules in the chapter 13 case in comparison to the information contained in the petition and schedules in the chapter 7 case.[vi] For example, the Schedule H to the chapter 13 petition indicated there were co-debtors, while the Schedule H to the chapter 7 petition did not.[vii] Further, the chapter 13 petition reflected monthly payments on the debtor’s first mortgage of $823.73, while the chapter 7 petition reflected a monthly first mortgage payment of $1,700.[viii] In addition, the chapter 7 petition failed to reveal a Citibank bank account, which the debtor disclosed in the chapter 13 petition.[ix] Subsequently, the judgment creditor commenced an adversary proceeding seeking to dismiss the chapter 7 petition as a bad faith filing, or alternatively, to deny the debtor’s discharge.[x] While the bankruptcy court refused to dismiss the case, the court did enter an order denying the debtor’s discharge.[xi] Shortly after the court entered that order, the judgment creditor moved for sanctions against the debtor and the debtor’s attorney pursuant to Rule 9011, § 707(b)(4)(C) and (D), 11 U.S.C. § 105, 28 U.S.C. § 1920, 28 U.S.C. § 1927, and the court’s inherent powers.[xii] The bankruptcy court initially denied the sanctions motion.[xiii] On appeal, however, the district court remanded the matter for further findings.[xiv] On remand, the bankruptcy court found that the debtor’s chapter 7 attorney’s conduct was sanctionable pursuant to Rule 9011(b)(3) as to the attorney and his firm.[xv] The bankruptcy court declined to impose monetary sanction; instead, the court determined that publication of its decision was an appropriate sanction against the chapter 7 attorney and his firm.[xvi]
Rule 9011(b)(3) provides that by signing a bankruptcy petition, an attorney certifies “to the best of [his] knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, 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.”[xvii] While the attorney’s investigation does not have to be to the point of certainty, he “must explore readily available avenues of factual inquiry.”[xviii] The attorney must also independently verify publicly available information to ensure the client representations are objectively reasonable and consistent.[xix] If the attorney fails to live up to this duty, courts must exercise discretion to determine which sanction is appropriate.[xx] Possible sanctions range from an award of attorney's fees, to reprimand or even disbarment.[xxi] Generally, courts should award the minimum sanction necessary to deter future sanctionable conduct.[xxii] However, courts may also consider factors including the reasonableness of costs and expenses incurred by the party seeking sanctions, prejudice suffered by the party seeking sanctions, the relative culpability of client and counsel, the degree to which the party seeking sanctions caused the expenses for which recovery is sought, whether the sanctionable conduct was a conscious disregard of duty, and the general reputation of the individual to be sanctioned.[xxiii]
For example, the Parikh court found that the inaccuracies and omissions in the debtor’s chapter 7 petition should have been apparent to the debtor’s counsel because the information was either publically available or provided to the chapter 7 attorney by the debtor himself.[xxiv] In particular, the Parikh court emphasized that had counsel adequately investigated and reviewed the chapter 13 petition and docket from a state court foreclosure action against the debtor before signing the chapter 7 petition, it would have revealed the discrepancies.[xxv] Further, the Parikh court rejected the chapter 7 attorney’s argument that the “emergency” nature of the filing excused the deficiencies in the initial petition for three reasons.[xxvi] First, the Parikh court concluded that the arrest warrant issued due to a state court finding of contempt did not create an emergency because the warrant had been issued four months prior to the filing.[xxvii] Second, the Parikh court went on to note that the emergency nature of a bankruptcy filing does not excuse compliance with Rule 9011(b).[xxviii] Finally, the Parikh court observed that the chapter 7 attorney had not filed a “bare bones” petition, but had rather merely filed an inaccurate petition.[xxix] Therefore, the Parikh court held that the chapter 7 attorney’s conduct relating to filing of the petition was sanctionable pursuant to Rule 9011(b)(3).[xxx] The Parikh court then went on to discuss the appropriate sanction to impose against the chapter 7 attorney and his firm.[xxxi] Importantly, the Parikh court did not find that the chapter 7 attorney consciously disregarded his duties; instead, the court believed that the chapter 7 attorney’s conduct was careless and could be addressed by changes to the attorney’s firm’s intake procedures.[xxxii] Moreover, given that the chapter 7 attorney was a respected practitioner before the court,[xxxiii] the Parikh court indicated that it was confident that he would conduct sufficient inquiries under Rule 9011 in the future.[xxxiv]
In re Parikh serves as a reminder to lawyers of their duties under Rule 9011(b).[xxxv] In particular, Rule 9011(b) imposes an affirmative duty on bankruptcy practitioners to conduct an inquiry into the facts presented in a bankruptcy petition and schedules that is reasonable under the circumstances. Such inquiry requires investigation into publically available information, including previous bankruptcy filings. In practice, this requirement is not difficult to comply with since previous bankruptcy filings are publically available on PACER. In addition, a consumer bankruptcy attorney should, at a minimum, search publically available court dockets and obtain credit reports to confirm the accuracy of the information provided to the attorney by the client. As the Parikh court noted, even in an emergency, there is a “fine line” between zealous advocacy and conduct that is sanctionable.[xxxvi] If there truly is an emergency, In re Parikh seems to indicate that an attorney should file a bare bones petition and file the schedules and SOFA at a later date, instead of filing a petition with factual inaccuracies. Ultimately, the take away from the In re Parikh decision is that while an attorney can trust his clients, the attorney has a duty to take reasonable steps to verify the information provided to him by his clients before he files their petitions.
[i] 508 B.R. 572 (Bankr. E.D.N.Y. 2014).
[ii] Id. at 578.
[v] Id. at 581.
[vi] Id. at 590.
[viii] Id. at 591.
[x] Id. at 582.
[xi] Id. at 582-83.
[xii] Id. at 583.
[xv] Id. at 594.
[xvi] Id. at 595-96.
[xvii] Fed. R. Bankr. P. 9011(b)(3) (emphasis added).
[xviii] In re Parikh, 508 B.R. at 585 (quoting In re Obasi, 10-10494 SHL, 2011 WL 6336153 at *5 (Bankr. S.D.N.Y. Dec. 19, 2011)).
[xix] In re Parikh, 508 B.R. at 585 (quoting Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329 (3d Cir. 1995)).
[xx] Id. at 595.
[xxiv] Id. at 588.
[xxv] Id. at 594.
[xxxi] Id. at 595.
[xxxiii] The chapter 7 attorney is a standing chapter 7 trustee in the Eastern District of New York. See Chapter 7 Panel Trustees Office Locator, the united states department of justice (2015), http://www.justice.gov/ust/eo/private_trustee/locator/7.htm#NY.
[xxxiv] In re Parikh, 508 B.R. at 595.
[xxxv] Id. at 579.