Petition Under Rule 12(b)(6) Section 12(b)(6) Could Still Result in Sanctions Under Bankruptcy Rule 9011 | Fox Rothschild LLP

Surviving a motion to dismiss does not necessarily mean that the attorney drafting a pleading will survive a motion for penalties under Rule 9011 if he or she failed to conduct a “reasonable investigation” into the allegations and/or or that the allegations without investigation in the pleadings will not be expunged or that the attorney will not be ordered to pay penalties. In re Defeo, No. 4:21-CV-03263-SAL, 2022 WL 3691358, at *5 (DSC 25 Aug 2022). According to a recent case heard in South Carolina Bankruptcy Court, which was upheld by the South Carolina District Court, simply reciting the required elements of a claim in adversarial proceedings without first conducting a “reasonable inquiry” may be legally sufficient to meet the requirements to survive a motion to dismiss, but it also violates Bankruptcy Rule 9011 because different standards are applied to motions. Identifier.

“In considering a motion to dismiss, the Court considers the legal sufficiency of the complaint and its inquiry is limited to whether the allegations constitute a short and clear statement of the claim showing that the litigant is entitled to relief. At the motion to dismiss stage, the allegations in the complaint are accepted as true, regardless of the Court’s skepticism. » In re Defeo632 BR 44, 55 (Bankr. DSC 2021), Affirmed, No. 4:21-CV-03263-SAL, 2022 WL 3691358 (DSC 25 Aug 2022).

On August 25, 2022, the bankruptcy court’s penalty order in the amount of $10,000[1] and the removal of the uninvestigated allegations from the complaint in adversarial proceedings was upheld by the District Court against David H. Breen and Matthew M. Breen, which also awarded $3,000 in additional penalties against the Breens for filing a frivolous appeal under Bankruptcy Rule 8020 after they filed cross-complaints against a medical practice. Identifier. at 9 o’clock. The adversarial action, based on violations of the automatic stay, was filed against a medical firm without conducting a prior investigation of the underlying facts – including the failure to contact the medical firm before filing the action – then they filed an appeal that mischaracterized and misrepresented many of the facts of the underlying case. Identifier. at 8.

Before receiving the notice of bankruptcy, the defendant sent an invoice to the debtor in the amount of $910. Identifier. at 1. The debtor’s lawyer contacted the defendant by telephone to inform him of the bankruptcy and then notified him of the bankruptcy. Identifier. The defendant claims to have its usual safeguards in place, but due to a computer error, another notice was sent shortly after receiving the bankruptcy notice. Identifier. The invoice faintly stated, “Your account is in default and may be sent to a collection agency. Please call.” Identifier.

The debtor’s attorney never contacted the defendant after receiving the bill, but instead filed a cross-complaint claiming $50,000 in damages in the caption. Identifier. at 2 o’clock. The opponent’s complaint contained a plethora of strongly worded allegations such as:

[W]with specific intent to violate bankruptcy laws, [Defendant] contacted [Debtor] by letter dated February 3, 2021 unlawfully attempting to collect a debt of $910.00 listed in [Debtor’s] case of bankruptcy”. [Compl. ¶ 9 (emphasis added).]

“The acts of the defendant, by and through its agents, servants and/or employees, establish this creditor as one who does not hesitate to engage in excessively aggressive, underhanded, deceptive, manipulative, oppressive, abusive and illegal collection. [Compl. ¶ 11 (emphasis added).]

Identifier. at 2 o’clock.

Bankruptcy Rule 9011, like Rule 11, imposes duties on all attorneys who file documents and appear in bankruptcy court, including the duty of candor to the court. Bankruptcy Rule 9011 provides, in part:

(b) Representations in Court:

By presenting in court (whether signing, filing, submitting or later defending) any motion, plea, written request or other document, an attorney or an unrepresented party certifies that to the best of knowledge, information and beliefs of the person, formed after reasonable inquiry in the circumstances,

(1) it is not presented for an improper purpose, such as to harass or cause unnecessary delays or an unnecessary increase in the cost of litigation;

(2) the claims, defenses and other legal arguments set forth therein are justified by existing law or by a non-frivolous argument for the extension, modification or repeal of existing law or the establishment of new law ;

(3) the allegations and other factual assertions are supported by evidence or, if specifically identified as such, are likely to be supported by evidence after a reasonable opportunity for further investigation or discovery; and

(4) denials of factual assertions are supported by the evidence or, if specifically identified as such, are reasonably based on a lack of information or belief.

Fed. R.Banker. P. 9011 (emphasis added). In re Defeo, No., 2022 WL 3691358 at *3.

Discovery can be used to “reveal Additional facts to support factually well-founded allegations”, but lawyers are subject to penalties for asserting frivolous allegations in pleadings that are not supported by any factual support. Identifier. at 6.

The debtor’s attorney had survived a motion under Rule 12(b)(6) in another nearly identical adversarial case they had filed on behalf of other debtors, Waters v. McCleod Seacoast Hospital (In re Waters), C/A no. 19-05230, Adv. Pro. No. 19-80090, slip op., 2020 WL 1884191 (Bankr. DSC February 13, 2020), involving only collection letters in which they also did not call to investigate the allegations they raised in their complaint. In re Defeo632 BR at 55. Therefore, they argued that they had no obligation to call the defendant before filing the contradictory action. Identifier. In response, the bankruptcy court explained:

When considering a motion to dismiss, the Court considers the legal sufficiency of the complaint and its inquiry is limited to whether the allegations constitute a short and clear statement of the claim demonstrating that the litigant is entitled to relief. At the motion to dismiss stage, the allegations in the complaint are accepted as true, regardless of the Court’s skepticism.

Identifier.

Due to different standards of review, if an attorney is found to have failed to properly investigate or make a reasonable inquiry into the facts or allegations set out in the complaint at the time of signing the complaint, even if a complaint survives a Rule 12(b)(6), the attorney, personally, could still be subject to sanctions under Bankruptcy Rule 9011(b)(3). Violation of Bankruptcy Rule 9011(b)(3) may result in monetary penalties and/or allegations that have not been investigated may be struck from the pleadings.

[1] The offending party in this case had initiated more than 100 adversarial proceedings for willful violation of the automatic stay based on simple collection letters. In re Defeo632 BR at 62. When imposing sanctions, “the least severe sanction” must be imposed. Identifier. at 59. The primary purpose is to “deter future abuse of litigation”. Identifier. The bankruptcy court considered (1) the reasonableness of attorneys’ fees; (2) the minimum to deter; (3) the ability of the breaching party to pay; and (4) other factors including whether the offending party had filed more than 100 adversarial proceedings for willful violation of automatic stay based on sending simple collection letters, seriousness of the violation, degree which bad faith or malice contributed to the violation, and the risk of paralyzing this type of litigation. Identifier. at 61-63.

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