Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Failure to Disclose Post-Confirmation Asset to Chapter 13 Trustee Results in Sanctions Against Debtor’s Attorney

In an unpublished decision, the Ninth Circuit Bankruptcy Appellate Panel recently upheld sanctions of $2685 against a chapter 13 debtor’s attorney for advising the debtor not to disclose to the chapter 13 trustee a post-confirmation automobile accident recovery.  In re MaGee, 2013 Westlaw 5310472 (9th Cir. BAP unpublished). The bankruptcy court held that, under its inherent authority, it would impose sanctions because attorney MaGee’s conduct constituted bad faith in that he intentionally or recklessly misconstrued the disclosure requirements sets forth in the confirmation order for the improper purpose of concealing the claims from the trustee and the bankruptcy court.

Debtor retained attorney MaGee to file her chapter 13 petition in 2008.  The plan was confirmed and in relevant part, the confirmation order provided that “the debtor shall inform the Trustee of any changes in circumstances or receipt of additional income….”

In 2009, Debtor and her family were involved in an automobile accident.  Debtor sued the other driver and reached a settlement of $25,000 on her Third Party Claim.  In 2010 Debtor sued her own insurer under her underinsured motorist coverage (UIM Claim) and in 2011 she was awarded $50,000 on account of her UIM claim through arbitration.  She never disclosed either the Third Party Claim or the UIM claim to the chapter 13 trustee or the bankruptcy court, although, according to the Debtor, she met with her bankruptcy attorney and asked if the claims needed to be disclosed.  Attorney MaGee allegedly told her 1) that she did not need to worry about the claims because they were not income; and 2) that she did not need to worry about reporting the claims because the chapter 13 trustee’s office was “a mess” due to internal issues and therefore was unlikely to catch any failure to disclose. Attorney MaGee disputed that the meeting ever took place and that he ever told her that she did not need to disclose the claims.

After Debtor’s discharge, the insurer filed a state court motion to clarify to whom the money should be paid in light of the bankruptcy and also notified the chapter 13 trustee.  The trustee then commenced discharge revocation proceedings against Debtor. The court revoked the Debtor’s discharge and reserved the issue of whether sanctions should be imposed against her bankruptcy attorney. The trustee also filed a motion seeking to modify the Debtor’s chapter 13 plan to have the UIM award paid to her unsecured creditors.

On appeal, attorney MaGee raised three arguments, all of which were rejected.  First, he claimed that he had no duty to disclose the claims or the associated recoveries because he did not “objectively know” about the claims.  However, the argument regarding duty hinged on a factual dispute about a meeting between the Debtor and her attorney.  The BAP upheld the bankruptcy court’s finding that the Debtor was the more credible witness because there was no evidence that the testimony was so “internally inconsistent or implausible on its face that a reasonable factfinder would not credit it.” Anderson v City of Bessemer City N.C., 470 U.S. 564, 575 (1985).  Given that the attorney was charged with knowing of the claims, he thereafter had a duty as debtor’s attorney and an officer of the court to help her comply with the bankruptcy court’s confirmation order by facilitating disclosure of the claims.  A litigant’s counsel engages in bad faith conduct sanctionable under the bankruptcy court’s inherent authority when he or she intentionally impeded enforcement of the court’s orders.  See, Miller v Cardinale (In re Deville), 280 B.R. 483, 495-96 (9th Cir. BAP 2002), aff’d 362 F.3d 539 (9th Cir. 2004 (affirming inherent authority sanctions award against litigant and his counsel based in part on their mutual efforts to hamper enforcement of the court’s orders).

Second, attorney MaGee argued that several facts, including that the bankruptcy court ultimately decided at the trustee’s motion to modify the plan that only $850 of the $50,000 recovery constituted estate property, should have caused the bankruptcy court to exclude the claims from the “any changes in circumstances” disclosure requirement.  However, the BAP emphasized that it was not the debtor’s (or their counsel) decision to make – “the bankruptcy disclosure requirements would become largely unenforceable and our entire bankruptcy system would be threatened” if debtor’s or their counsel “were able to evade their disclosure-related responsibilities by making their own unilateral and self-serving determinations of what is and is not material.”

Finally, attorney MaGee argued that the sanctions in the sum of $2685, the amount attorney MaGee charged for his pre-confirmation services, were punitive.  In his reply brief on appeal he also raised that the bankruptcy court had ultimately reinstated the Debtor’s discharge after the sanctions hearing, and on that basis the sanctions award should be vacated.  The BAP ruled that the attorney had an abundance of opportunity to be heard in the two days of live testimony, which was held several months after the OSC was issued, and that the sanction amount was properly compensatory in nature.  Further, the BAP ruled that because it was not permitted to consider documents and facts that were not before the bankruptcy court at or before it ruled, it could not consider the reinstatement of the Debtor’s discharge.

–Radmila Fulton

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**