November 2012 Vol. 9, No. 3

9.3.5

Attorney Sanctions

Case:

Valdez v. Kismet Acquisition, LLC (S.D. Cal. 2012)  474 B.R. 907

Issue:

Bankruptcy court sanctioned counsel pursuant to court’s inherent authority for counsel’s (1) advising client to disobey a bankruptcy court order directing client to transfer certain foreign assets; (2) collaterally attacking the order by pursuing an injunction against the transfer in a foreign court; and (3) filing generally meritorious objections to transfer documents solely for delay and knowing that the client had no intention of signing the documents.  Did bankruptcy court err in not considering the extent of sanctioned counsel’s specific responsibility for the opposing party’s actual loss and sanctioned counsel’s ability to pay the amount of the sanctions?

Holding:

Yes.  On review, the district court found that bankruptcy court had correctly found that sanctions were warranted.  The district court rejected counsel’s contention that her initial efforts to persuade her client to comply with the bankruptcy court order negated later advice to obtain a injunction in a foreign court against that order.  (474 B.R. at 917-918.)  The Court also found that counsel properly was sanctioned for bad faith assertion of even meritorious objections to the proposed transfer documents since she knew her client had no intention of signing any proposed transfer documents.  (Id. at 918-919.)

The Court nonetheless remanded the sanctions order to the bankruptcy court to consider:  (1) the extent to which sanctioned attorney’s “particular conduct” resulted in actual losses to the opposing party; and (2) the sanctioned attorney’s ability to pay the amount of the sanctions.   (Id. at 922-923.)   The Court noted that the losses incurred by the opposing party were primarily caused by the sanctioned attorney’s client’s refusal to sign the transfer documents in addition to being caused by the conduct of other attorneys who were not held jointly and severally responsible for the sanctions.  “[W]hile the finding that [sanctioned attorney] prolonged the proceedings is not clearly erroneous, there were no specific findings of fact that the size and scope of the sanction were tied to or proportionally related to the extent of the delay resulting from her particular actions.”  (Id. at 923.)  The bankruptcy court’s failure to consider sanctioned counsel’s ability to pay up to $700,000 in sanctions for which she was found jointly and severally liable with her client was an independent legal basis for vacating the monetary sanctions.  (Ibid.)

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