1995 #03, Huffman, 2-15-95

In re: PAUL HUFFMAN, Bankr. Case No. 94-50106, Chapter 7

MEMORANDUM OF DECISION RE: RULE 9011 MOTION

The matter before the Court is Dakota Plains Federal Credit Union's request for attorney's fees and expenses as sanctions against Debtor and Debtor's counsel regarding Debtor's response to the Credit Union's motion for relief from the automatic stay and to compel abandonment. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Memorandum Decision and accompanying Order shall constitute findings and conclusions under F.R.Bankr.P. 7052. As set forth more fully below, the Court concludes that a monetary sanction of $400.00 payable by Debtor's counsel to the Credit Union is appropriate.

I.

Debtor's Chapter 12 case was converted to a Chapter 7 proceeding on October 20, 1994. Dakota Plains Federal Credit Union filed a Motion for Relief From Automatic Stay and Motion to Compel Abandonment of Specified Collateral on November 9, 1994. Debtor filed a response that raised several issues regarding the ownership of property, his claim of exemptions, and the extent of certain security interests. His listing of exempt property did not constitute a valid amendment of his schedule of exempt property under F.Rs.Bankr.P. 1008 and 1009(a). Dakota Plains Federal Credit Union filed a response to Debtor's response and noted that Debtor was trying to protect estate property and that Debtor was making statements regarding ownership of property or the validity of security interests in certain property that were contrary to the record. Dakota Plains Federal Credit Union also filed a separate motion requesting that sanctions be entered because Debtor's response was not well grounded in fact and was interposed for an improper purpose.

Due to Debtor's response, a hearing on the Credit Union's motion for relief from the automatic stay and to compel abandonment was held December 6, 1994. Appearances included Richard Pluimer for Dakota Plains Federal Credit Union, James P. Hurley for Debtor, Trustee Dennis C. Whetzal, and Robert M. Nash for Bank of Lemmon. After hearing the arguments of counsel, the Court granted Dakota Plains Federal Credit Union's Motion. The Court also directed Attorney Pluimer to file a statement of costs and directed Debtor to file a response to Dakota Plains Federal Credit Union's sanctions motion.

Attorney Pluimer's affidavit of costs was filed December 6, 1994. He stated his legal fees for the services rendered regarding the Credit Union's response to Debtor's response and his appearance at the hearing and travel totaled $608.50.

Debtor filed a response to Dakota Plains Federal Credit Union's sanctions motion on December 12, 1994. Therein, Debtor stated his response to Dakota Plains Federal Credit Union's motion for relief and abandonment was filed not for improper purpose but to avoid problems with a sale of estate property and to insure that there were no misunderstandings about what constituted estate property and what security interests existed. Debtor also recited his cooperation with the Trustee's and creditors' liquidation of his assets.

II.

Debtor's duties. The duties of a Chapter 7 debtor include filing his schedules and statement of financial affairs, cooperating with the trustee, and appearing at the § 341 meeting of creditors. 11 U.S.C. § 521 and F.R.Bankr.P. 4002. When a case is converted from a Chapter 11, 12, or 13 to a Chapter 7, the debtor also must file conversion reports. F.R.Bankr.P. 1019.

In contrast to a Chapter 7 debtor's duties, the trustee must account for estate property, liquidate the estate, investigate the debtor's financial affairs, and object to any improper claims, as is necessary. 11 U.S.C. § 704.

Imposition of Sanctions. The imposition of sanctions is a serious matter that this Court must approach with circumspection. Lupo v. Rowland & Co., 857 F.2d 482, 485 (8th. Cir. 1988); O'Connell v. Champion International Corp., 812 F.2d 393, 395 (8th Cir. 1987). Rule 9011(a) provides (in pertinent part):

Every petition, pleading, motion and other paper served or filed in a case under the Code on behalf of a party represented by an attorney, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney's individual name, whose office address and telephone number shall be stated. . . . The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney's or party's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation or administration of the case. . . . If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney's fee.

Rule 9011(a) tracks F.R.Civ.P. 11 (before the amendments on December 1, 1993). Case law on Rule 11, therefore, provides ample guidance.

Rule 9011 is designed to prevent abuses of the bankruptcy process by parties and their attorneys. Weiszhaar Farms, Inc. v. Livestock State Bank, 113 B.R. 1017, 1019-20 (D.S.D. 1990). The Rule addresses two types of sanctionable conduct: first, where the papers filed are frivolous, legally unreasonable, or without factual foundation; and second, where the pleading is filed for an improper purpose. Cooter & Gell v. Hartmarx Corp., 110 S.Ct. 2447, 2457 (1990); Grunewaldt v. Mutual Life Insurance Co. (In re Coones Ranch, Inc.), 7 F.3d 740, 743-44 (8th Cir. 1993), aff'g sub nom. In re Coones Ranch, Inc., 138 B.R. 251 (Bankr. D.S.D. 1991); Hartman v. Hallmark Cards, Inc., 833 F.2d 117, 124 (8th Cir. 1987); In re Cossey, 172 B.R. 597, 601 (Bankr. E.D. Ark. 1994); In re Cedar Falls Hotel Properties Limited Partnership, 102 B.R. 1009, 1014 (Bankr. N.D. Iowa 1989) (citations therein).

Whether a violation has occurred is determined within the court's discretion. Happy Chef Systems, Inc. v. John Hancock Mutual Life Insurance Co., 933 F.2d 1433, 1438 (8th Cir. 1991); O'Connell, 812 F.2d at 395. The standard to be applied is objective reasonableness under the circumstances. Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., 111 S.Ct. 922, 932-33 (1991). Subjective "good faith" cannot excuse the signer's action. Kurkowski v. Volcker, 819 F.2d 201, 204 (8th Cir. 1987). Bankruptcy Rule 9011 sanctions, however, should not be imposed on a party who makes a good faith argument based on existing precedent. Mid-Tech Consulting, Inc. v. Swendra, 938 F.2d 885, 888 (8th Cir. 1991).

When faced with a motion for sanctions, fact questions regarding the attorney's prefiling inquiry and the factual basis of the pleading must be answered. Cooter & Gell, 110 S.Ct. at 2457. The court also must answer the legal questions of whether a pleading is warranted by existing law or a good faith argument for changing the law and whether the attorney's signature violated the Rule. Id. Third, the court must in its discretion fashion an appropriate sanction. Id.

III.

The error committed by Debtor's counsel in filing Debtor's response to Dakota Plains Federal Credit Union's motion for relief from stay and abandonment was that he failed to change hats. Once a case is converted from a reorganization to a liquidation, the debtor's role changes. While the Chapter 7 debtor should cooperate with the case trustee, the Chapter 7 debtor should not assume an adversarial role when creditors and the trustee litigate issues regarding estate property. While Debtor expressed some valid concerns in his pleading, the Court's discussion with counsel at the hearing indicated that most items of concern had been addressed earlier by the Credit Union, the case trustee, and other interested creditors. Other matters were resolved easily between counsel for Debtor and counsel for the Credit Union. The hearing was unnecessary. A telephone call or two would have addressed all matters raised in Debtor's response.

It also is true that counsel for the Credit Union may have avoided filing a response to Debtor's concerns and a trip to Rapid City for the hearing had he called Debtor's counsel to discuss the matter. The parties may then have been able to report a resolution to the Court without a hearing.

Since Debtor's response to the Credit Union's motion for relief from stay and abandonment raised concerns that exceeded the Debtor's duties and which overlapped areas for which the case trustee is responsible and since Debtor's response prompted unnecessary litigation, the Court will impose sanctions of $400.00 on Debtor's counsel payable to the Credit Union.

This Court has been working diligently to promote civility and common courtesies among counsel. When a telephone call or letter will raise a valid question, solve a problem, or advise the opposing party or the Court when the status of a hearing changes, counsel should choose that avenue over unnecessary pleadings and court time. Unfortunately, this is not the first time that Attorney Hurley has failed to communicate appropriately with opposing counsel and the Court. Therefore, a monetary sanction is imposed. The sanction is not intended to reimburse the Credit Union but is intended as a deterrent to such pleadings in the future. A larger sum is not appropriate because the Credit Union's counsel also contributed to the unnecessary hearing by not attempting to resolve the matter before the hearing.

An order will be entered.

Dated this 15th day of February, 1995.