Page 3
Ninth Circuit Bankruptcy Appellate Panel:
Nonmonetary Sanction Properly Imposed on Lawyer, Client
Judges Find Filing of Meritless Complaint Alleging Debt to Be Nondischargeable to Be Reprehensible
By a MetNews Staff Writer
A Santa Ana attorney and his client were properly ordered not to file any complaint in the U.S. Bankruptcy Court for the Eastern District of California seeking a declaration that a debt is nondischargeable without submitting to a prefiling review, the Ninth U.S. Circuit Court of Appeals Bankruptcy Appellate Panel held yesterday.
The attorney affected by the order is Karel Rocha, a principal attorney with the firm of Prenovost Normandin Dawe & Rocha. On behalf of his client Golden 1 Credit Union, he sought to bar a discharge of a debt in the amount of $9,000, in the form of a loan, incurred by Megan Christine Fiedler.
Fiedler took out the loan to help pay off the $12,400 balance on her Wells Fargo credit card. She paid $10,500, but still owed money to Wells Fargo, and made additional charges, with interest mounting. She declared bankruptcy on March 21, 2023, under Chapter 7.
Golden 1 alleged that Fiedler obtained the loan from it “with no intent to ever repay,” invoking 11 U.S.C. § 523(A)(2) which proclaims nondischargeable a debt in the form of money obtained through “false pretenses, a false representation, or actual fraud.”
Fiedler insisted she had “every intention of paying Golden 1 back” and did not file for bankruptcy until she realized would “never be able to get out from under” absent resorting to that protection.
Bankruptcy Judge’s Ruling
The sanction was imposed by Bankruptcy Court Judge Christopher M. Klein of the Eastern District of California. He acted under authority of Rule 9011 which prohibits the filing of frivolous complaints.
Klein was particularly critical of Paragraph 14 of the complaint which states that the loans did not create “consumer debts…to the extent that they were based upon fraud and willful, malicious, and tortious injury.” He said the allegation “appears to serve only the purpose of attempting to elude” Golden 1’s “potential liability for fees and costs” which are imposed when “a § 523(a)(2) fraud complaint on a ‘consumer debt’ that winds up being discharged.”
The judge declared that as a “matter of law, fraudulent intent does not disqualify a debt from ‘consumer debt’ status.”
Decision Affirmed
Affirming the sanction, in a memorandum opinion, were Bankruptcy Appellate Panel Judges William J. Lafferty III, Julia W. Brand, and Frederick P. Corbit. They wrote:
“[T]he record demonstrates that the bankruptcy court found the entire Complaint frivolous, not just paragraph 14. Second, the record demonstrates that the bankruptcy court determined that Appellants’ conduct was particularly egregious, not merely negligent, thus satisfying the heightened standard.”
The judges said that “there was no justifiable legal basis for the inclusion of paragraph 14” and that Klein “did not clearly err in determining that the allegation was added to the Complaint for two possibly improper purposes: (1) to intimidate as part of an effort to extract an unjust settlement; and/or (2) a “transparent effort to evade § 523(d) liability for a creditor who sues unsuccessfully to establish a consumer debt was obtained by nondischargeable § 523(a)(2) fraud.”
Entire Complaint Frivolous
They added:
“Beyond paragraph 14, the bankruptcy court determined the Complaint as a whole was frivolous and filed for an improper purpose. Specifically, the bankruptcy court determined that the Complaint did not have a sufficient factual or legal basis, and therefore, Rocha’s inquiry was not reasonable under the circumstances.”
The mere fact that a loan is not repaid does not support an allegation that it was obtained through fraud, they said, adding:
“[T]he record reflects that contrary to Appellants’ assertions, the evidence amply supports the bankruptcy court’s determination that the Complaint was both factually and legally ‘baseless’ and made without a ‘reasonable and competent inquiry.’ Accordingly, the bankruptcy court did not abuse its discretion in finding the Complaint to be ‘frivolous’ and thus sanctionable under Rule 9011.”
Heightened Standard
There is a heightened standard under that rule where the judge, rather than a party, institutes a Rule 9011 hearing, as Klein did. The appeals judges said that Klein “appears to have applied the incorrect legal standard because the Sanction Order indicates that the filing of the Complaint was evaluated under a reasonable attorney standard rather than the heightened ‘akin to contempt’ standard,” but added:
“Nonetheless, we determine that remand is not necessary because the bankruptcy court’s findings, combined with the record, sufficiently support the court’s decision to sanction Appellants under Rule 9011….
“Although the bankruptcy court did not specifically state that Appellants’ conduct was egregious or in bad faith, the bankruptcy court’s many admonishments throughout the proceedings demonstrate that the bankruptcy court found Appellants’ conduct flagrant and intolerable and not merely negligent, thus satisfying the heightened ‘akin to contempt’ standard.”
Penalty Justified
Finding that Klein did not abuse his discretion in imposing a prefiling requirement, the judges said:
“Here, the bankruptcy court had the authority to sanction Appellants even after the Complaint was voluntarily dismissed….Although Appellants are correct that courts sometimes find admonishment is a sufficient sanction to deter repetition of the violating conduct, Appellants provide no legal support that the bankruptcy court was confined to imposing only an admonishment as a sanction.”
The case is In re Fiedler, EC-23-1185.
Copyright 2024, Metropolitan News Company