The following is a case update analyzing a recent case of interest:
In Gomez v. Stadtmueller (In re Gomez), 592 B.R. 698 (9th Cir. BAP 2018), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit affirmed sanctions awarded against a debtor’s lawyer for claiming an exemption without sufficiently analyzing whether the debtor could assert the exemption. To read the full published decision, click here.
Gomez (the Debtor) listed a 2001 Ford Focus on his bankruptcy schedules and claimed a full exemption in the car, but he failed to list or advise the chapter 7 trustee of his 2012 Chevrolet Malibu at two 341(a) meetings of creditors. The Debtor subsequently amended his Schedule A/B to list his 2012 Chevrolet Malibu. Through his counsel, Aldana, the Debtor also listed a secured claim against the Malibu in favor of Anayas Auto Sales (“Anayas”) for $2,700. The Debtor did not amend Schedule C to claim an exemption in the Malibu before he received his discharge.
The trustee discovered that Anayas failed to perfect its lien in the Malibu until after the Petition Date. The trustee obtained a default judgment against Anayas to avoid its lien as a post-petition transfer under section 549. The trustee then emailed Aldana requesting the Debtor turn over the Malibu to the trustee’s auctioneer or offer to buy it. The trustee also visited the Debtor at his residence to inquire about the Malibu, but the Debtor was not there. Instead, a woman at the residence told the trustee she would deliver his message to the Debtor. Aldana did not respond to the email and the Debtor did not contact the trustee following his visit.
The trustee next filed a motion to compel the turnover of the Malibu. After the bankruptcy court issued a tentative ruling on the motion, indicating it would grant the motion, Aldana contacted the trustee and told him he was puzzled by the ruling since the Malibu was exempt. The trustee left Aldana a voicemail telling him that the Debtor had not exempted the vehicle. Aldana did not respond, but that same day the Debtor amended Schedule C, exempting the Malibu and the Ford Focus under CCP § § 703 and 704..
The bankruptcy court granted the motion to compel. The trustee then objected to the Debtor’s exemption in the Ford Focus and the Malibu under section 522(g)(1). The trustee also sought an award of fees and costs as part of the objection. No opposition was filed to the objection and the bankruptcy court sustained the objection as to both vehicles. The court continued the hearing on the issue of compensatory sanctions and coercive sanctions under its inherent authority. Aldana did not timely file a brief in response to the continued hearing, instead filing two declarations on the same day the trustee filed his brief. At the continued hearing, the bankruptcy court sanctioned Aldana in the amount of $1,475.00 under its inherent authority. The court found that Aldana received the trustee’s demands and motions but failed to oppose anything. He then attempted to do an end run around the default and exempt the Malibu on the basis of two seriously flawed arguments. The court ordered Aldana to report the sanctions to the California bar.
The BAP began its analysis by noting the standard of review for a sanctions order is abuse of discretion. An abuse of discretion occurs when the bankruptcy court applied an incorrect legal rule or its application to the facts was illogical, implausible, or without support in inferences that may be drawn from the record. Next, the BAP enunciated the principles authoring the sanctions used here, stating that before a bankruptcy court imposes sanctions under its inherent authority, it must find either bad faith, conduct tantamount to bad faith, or recklessness with an additional factor such as frivolousness, harassment, or an improper purpose.
The BAP determined the bankruptcy court had not erred. The BAP rejected the Debtor and Aldana’s arguments because they failed to support them other than with a steadfast reliance on Law v. Siegel, 571 U.S. 415 (2014), that the Bankruptcy Code allows debtors to amend exemptions at any time before a case is closed. The Panel concluded, just as the chapter 7 trustee explained repeatedly to Aldana, under section 522(g)(1), the debtor cannot exempt property that the trustee recovers under certain sections of the Bankruptcy Code if the debtor voluntarily transferred or concealed the property. Because the law was not ambiguous or open to interpretation, the Debtor and Aldana’s arguments ignoring section 522(g)(1) were frivolous and reckless.
The BAP finished by rejecting each of Aldana and the Debtor’s other arguments and finding that the appeal was frivolous and lacked any merit. The BAP exercised its discretion and awarded the chapter 7 trustee his fees and double his costs under Rule 8020 of the Federal Rules of Bankruptcy Procedure.
A court can sanction a debtor’s attorney when reckless conduct is coupled with improper purpose. The most astonishing aspect of this decision is that the debtor’s counsel will likely pay thousands more in sanctions than the value of the car. Footnote five to the opinion succinctly highlights more of the bad faith at play here. It is refreshing to see courts use the sanction remedies suggested by Law v. Siegel, 571 U.S. 415 (2014), in a creative way that is effective. Some of these sanction remedies were initially panned by commentators as being toothless because they would have no impact on judgment-proof debtors. Turning the sanctions against the attorneys who counsel bad faith debtors, however, may prove to be a more useful deterrent.
These materials were written by Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California (email@example.com). Editorial contributions were provided by Adam N. Barasch of Severson & Werson, APC in San Francisco, California (firstname.lastname@example.org), and Hon. Meredith A. Jury (ret.). Messrs. Gomez and Barasch are members of the Insolvency Law Committee.