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					Recent Bankruptcy Developments, Vol. 7, No. 2
August 20, 2008

RULE 9011 SANCTIONS - FAILURE TO STIPULATE
In Re Martinez, 2008 WL 3155034 (Bankr. Nev. , August 1, 2008)

Is it worse for a court to sanction behavior that does not violate Rule 9011, or fail to
sanction behavior that does? Reasonable minds may differ. Either way, this case shows
that the scope of conduct sanctionable under Rule 9011 may be expanding. In this case,
counsel and their client, Wells Fargo Bank, were sanctioned by Las Vegas Bankruptcy
Judge Bruce Markell for refusing to stipulate to set aside an erroneous order.

The Chapter 13 debtors owned three houses. At least two of the houses were encumbered
by deeds of trust in favor of Wells Fargo Bank. The debtors’ petition clearly indicated
that they intended to keep one of the three houses and let the other two go. At a pre-
confirmation meeting between the debtors’ counsel and Wells Fargo’s counsel, they
worked out and signed a stipulation granting relief from stay. Unfortunately, by mutual
mistake it referred to the house that the debtors intended to keep, rather than one of the
houses they were willing to let go. The stipulation was submitted to the court and entered
as an order.

Subsequently, debtors’ counsel realized the mistake and asked Well Fargo’s counsel to
stipulate to set it aside. Counsel for Wells Fargo refused. Debtors’ counsel then filed an
application for order shortening time to hear his motion to set aside the erroneous
stipulation and order. Wells Fargo did not oppose the order shortening time, but counsel
for Wells Fargo did attend the hearing on the motion to set aside the erroneous order.
According to the opinion “his appearance consisted primarily of his statement that his
client, Wells Fargo, would not allow him to consent to vacate the stipulation.” The court
granted the motion to set aside the stipulation and order. The court also set an OSC re
sanctions aimed at Wells Fargo, the law firm that represented it, and the attorney who
appeared at the hearing.

Taking some pity on the associate attorney who made the appearance and originally
entered into the erroneous stipulation, the judge issued a private reprimand against him.
However, the court imposed both monetary sanctions and a public reprimand against
Wells Fargo and the law firm.

The conduct of Wells Fargo and its counsel is certainly less than professional and
collegial. However, did it violate Rule 9011? The court held that it did because an
attorney can be sanctioned not only for signing, filing, or submitting an improper paper –
counsel can also be sanctioned for “later advocating” such a paper. But is refusing to
stipulate to set aside an erroneous document the same as signing, filing, submitting, or
“later advocating” such a document?

The situation would be different if Wells Fargo’s counsel submitted written opposition to
the motion to set aside the stipulation and order. But Wells Fargo’s counsel did not do
so. The “later advocating” clause in Rule 9011 serves an important purpose because
continuing to advocate someone else’s improperly signed, filed, and submitted paperwork
is at least as bad as signing, filing, and submitting it in the first place. However, to
sanction a refusal to set aside an improper order seems to be stretching the rule beyond its
breaking point.

How much farther a court might take this rationale is hard to predict. However, one
shudders to think that one might be sanctioned for an off-hand comment or statement
made in the heat of an oral argument that is not specifically tied to any written document.
Sanctioning an attorney for filing or advocating something that the attorney should have
had time to reflect upon is different than sanctioning an attorney for argument made on
the fly. More importantly, sanctioning a refusal to stipulate, even to a reasonable request,
seems a bit over the line.

The court points out that it has the authority to sanction both the client and the attorneys
under the court’s inherent power to regulate practice before it. I believe that inherent
power was a more
appropriate basis for the sanction order, rather than Rule 9011.

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                                     DISCLAIMER

“Recent Bankruptcy Developments” is prepared by Christopher L. Blank, Esq. The
interpretations of law and opinions herein are solely those of the author alone, and do not
necessarily reflect those of the Orange County Bankruptcy Forum, its directors, officers,
or members. Cases, statutes, or rules summarized or cited herein should not be relied
upon without fully reading the case, statute, or rule, and checking subsequent case
history, etc. Mr. Blank wishes to express his appreciation to Dee Johnson for her
technical support. Constructive criticism, witty commentary, and opposing
viewpoints are encouraged and may be published in subsequent issues. Please send
them to Christopher L. Blank, 4675 MacArthur Court, Suite 550, Newport Beach,
CA 92660; 949/250-4600; email: clblank@pacbell.net

				
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