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April 09, 2019 Practice Points

New Insights on Sanctions Imposed by Bankruptcy Courts

Cautionary tales from two recent cases.

By Andrew M. Toft

Even for attorneys who do not represent consumers in bankruptcy court, In re Banks, Case No. 17-10456 (Bankr. W.D. Louisiana February 2, 2018), and Robbins v Delafield (In re Williams), Adv. Proc. No. 16-07024 (Bankr. W.D. Virginia, February 12, 2018), are required reading. Both opinions are cautionary tales on sanctions imposed in bankruptcy court.

In Williams, the United States Trustee’s office sought sanctions against debtor’s counsel on multiple grounds, including disgorgement (under § 329(a), § 105(a), § 329(b), § 526(c)(1)), injunctive relief to prevent violations of § 526, and civil penalties (under § 526(c)(5)(B)). The UST also alleged that inaccurate and misleading Rule 2016(b) disclosures were made. Judge Black’s detailed opinion is an excellent resource for the interpretation and application of law designed to protect both debtors and the integrity of the bankruptcy process. Sanctions imposed included:

  • Voiding of the Williams’ contract with their counsel under § 526(c),
  • Disgorgement of attorney’s fees received under § 329(b),
  • Revocation of privileges of firms and attorneys to file or conduct bankruptcy cases in the U.S. Bankruptcy Court for the Western District of Virginia for five (5) years,
  • Fines exceeding $250,000.00 and revocation of other attorneys’ privileges to appear in the U.S. Bankruptcy Court for the Western District of Virginia for 12–18 months, and
  • Other monetary sanctions against those attorneys.

Banks does not provide the same detailed legal analysis as Williams; however, Judge Norman’s 39-page opinion makes detailed factual findings before imposing significant sanctions against the firm (some pursuant to agreement with the UST) and local counsel pursuant to § 329, § 526 § 105 and Fed. R. Bankr. P. Rule 2017 including

  • Disgorgement of fees,
  • Imposition of a $5,000.00 civil penalty,
  • Suspension of both the firm and local counsel from practicing in the U.S. Bankruptcy Court for the Western District of Louisiana for 90 days,
  • Revocation of local counsel’s electronic filing privileges for 90 days, and
  • Additional sanctions.

Both opinions examine behavior that the courts found objectionable. Serious sanctions were imposed and local attorneys working with national consumer bankruptcy firms should read both opinions.

Andrew M. Toft is an attorney in Denver, Colorado.

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