In re Wilson

Citations: 234 B.R. 422; 34 Bankr. Ct. Dec. (CRR) 541; 1999 Bankr. LEXIS 660; 1999 WL 387299Docket: Bankruptcy Nos. 98-41554, 98-44203 S

Court: United States Bankruptcy Court, E.D. Arkansas; April 20, 1999; Us Bankruptcy; United States Bankruptcy Court

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Sanctions may be imposed on the debtor’s counsel, and the Chapter 13 bankruptcy case may be dismissed or converted, as per an Order to Show Cause issued by Bankruptcy Judge Mary D. Scott. A hearing occurred on March 24, 1999, involving all parties. The debtor had previously swindled over $89,500 from her employer between 1988 and 1991, later pleading guilty to theft of $20,000 in 1995. During her plea, she claimed a combined monthly income of $3,500 with expenses of $2,500, asserting she could pay restitution. Despite these claims, the debtor failed to make any restitution payments after being sentenced to pay $5,000 by November 21, 1995, and $730 monthly thereafter. 

Prior to the plea agreement, the debtor filed two Chapter 13 bankruptcy petitions in 1991, both in the Eastern District of Arkansas, dismissing the first case after less than a month without a discharge and neglecting to list her employer as a creditor. The second case was filed jointly with her husband shortly after the first was dismissed but also failed to include any governmental units or individuals related to the Texas criminal case. 

In 1996, Texas authorities sought to enforce the restitution, but the debtor avoided repercussions until her 1998 arrest. Following this, she filed a third bankruptcy case, listing Texas authorities as creditors but disputing the debt. The confirmed plan did not specifically address the restitution, stating only that disputed debts would not be paid. Subsequent actions included the debtor filing a Motion for Contempt against Texas prosecutors and an adversary proceeding against multiple attorneys and a judge, leading to motions to dismiss these actions. The judge was dismissed as a defendant on February 24, 1999.

On February 2, 1999, a status conference was held regarding the debtor's case, attended by attorneys for the Texas defendants and the debtor. The Court questioned the debtor's attorney about whether Texas governmental units had been notified in the debtor's prior bankruptcy filings. It became evident that the attorney had not sufficiently investigated the basis for a contempt motion, prompting the Court to consider an Order to Show Cause for sanctions and dismissal of the case. Rule 9011 outlines the requirements for attorneys when submitting documents to the court, including ensuring that filings are not for improper purposes and are supported by evidence or a reasonable belief in their validity. Additionally, 28 U.S.C. 1927 allows for the imposition of attorney's fees against those who unreasonably multiply proceedings. The bankruptcy court is empowered to sanction under this statute. A good faith belief in an argument's merit does not exempt an attorney from Rule 9011 sanctions; such belief must align with what a reasonable attorney would conclude. Counsel is obligated to investigate the debtor's claims before filing. Although the debtor presented documents including a petition, schedules, and a motion for contempt, a review did not conclusively show a violation of Rule 9011(b). The schedules included disputed debts, while the plan generally addressed these debts. The adversary proceeding sought to prevent the defendants from enforcing restitution payments outside the confirmed plan. The allegations asserted that proper notice of the bankruptcy was given, the plan was confirmed without objection, and that the Texas authorities are improperly demanding payments outside the plan, which could hinder the debtor's ability to make required payments if incarcerated.

The motion for contempt claims that Texas authorities are improperly trying to collect restitution through state court, bypassing the bankruptcy court and compelling the debtor to make payments outside the chapter 13 plan. The complaint seeks damages for violating the automatic stay under section 362(a). Counsel argued that he believed in good faith that the authorities were attempting to collect a potentially discharged debt without seeking relief from the stay, as the debt was accounted for in the ongoing chapter 13 plan. There are concerns regarding the legal implications of state court orders on the restitution debt's dischargeability. Although restitution is generally nondischargeable in bankruptcy under 11 U.S.C. 1328(a)(3), the lack of a formal conviction or sentencing in the debtor's case raises questions about whether the debt can be discharged. Counsel's findings suggested that since Texas defers adjudication until restitution conditions are met, there is no binding sentence that would render the debt nondischargeable. The debtor's chapter 13 plan does not provide for disputed debts, including restitution, which means that stating Texas authorities must collect through the bankruptcy court effectively results in no collection. Additionally, counsel's letters to state authorities wrongly implied that the restitution debt was discharged in a prior bankruptcy, despite the Texas authorities not being listed as creditors, indicating a lack of proper notice. This misrepresentation raises concerns about the appropriateness of counsel’s conduct, particularly regarding his reliance on a precedent case to argue that Texas authorities could not collect payments outside the plan.

Walters v. state court judges establishes that suing a state court judge is improper and warrants sanctions against counsel who names the judge as a defendant in an adversary proceeding, despite any potential advantages this may provide to the prosecution. The court emphasizes the requirements of Rule 9011: sanctions should punish current abuse, deter future misconduct, remedy damages, and preserve rights. Although the court has historically dismissed suits against state judges and has expressed disapproval of such actions, it considers the counsel's previous proper conduct and current employment in the public sector as mitigating factors against imposing sanctions. The court ultimately decides that no further action is necessary regarding the Order to Show Cause.

Additionally, the document addresses a separate bankruptcy matter where Cumis Insurance Company sought relief from a stay to recover funds related to an embezzlement case but later withdrew the motion, opting to file a proof of claim of $120, which was allowed but not paid. The court clarifies that while the Eleventh Amendment protects state sovereignty from being sued for damages in federal court, it does not exempt state entities from adhering to federal laws, including the Bankruptcy Code. Consequently, states are bound by the Bankruptcy Code provisions, such as the automatic stay, discharge injunction, and treatment of debts in bankruptcy plans. If a debt is included in a confirmed plan and a discharge is granted, future actions to collect that debt are precluded.

The Texas defendants acknowledge the significance of the plan's contents, yet their lack of objection to its confirmation raises questions. The court does not need to determine if a restitution debt exists under 11 U.S.C. § 1328 at this stage. Although the issue complicates dischargeability, the absence of a prior sentence or conviction clarifies that section 362(b) applies, allowing the continuation of criminal actions against the debtor despite the automatic stay. The potential for a future restitution sentence from the state court questions the validity of including un-ordered restitution in the plan. A letter to McAnnulty, included with a contempt motion, may have been 'presented to the court' under Rule 9011(b). Testimony indicated that Cumis Insurance Company, the only creditor listed in the debtor’s second bankruptcy case, is not listed in the current case. The court criticizes the debtor's approach, suggesting that issues regarding discharge should be raised by reopening the prior case rather than filing a new one, as this leads to confusion and procedural disarray. The governmental entities involved in the earlier case are absent, complicating the relationship between Cumis Insurance Company and the restitution debt sought by state prosecutors. Reopening the prior case would allow for clarification by including the insurance company, especially if their action against the debtor has been resolved or discharged, to prevent the state from pursuing restitution on their behalf.