In re Pigg
| Decision Date | 20 November 2015 |
| Docket Number | Case No. 14-50266-can7,Case No. 14-50416-can7 |
| Parties | IN RE LORI BETH PIGG, Debtor. IN RE JESSICA LENORE HARKINS, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Attorney Michael McCrary appeared before the Court for a final, evidentiary hearing in response to two sanctions motions and the Court's Order to Show Cause why additional sanctions should not be imposed. Mr. McCrary's actions, admissions, and arguments did little to persuade the Court that he should escape sanctions. Rather, the Court believes that sanctions and disgorgement totaling $8,649.501 are warranted, and that Mr. McCrary should be referred to the appropriate disciplinary authorities for the admitted ethical violations that damaged his clients, other parties in interest, and the integrity of the bankruptcy system.
Mr. McCrary is an experienced bankruptcy lawyer, representing consumer debtors in Chapters 7 and 13 in the various divisions of the Western District of Missouri. He is also the bankruptcy attorney who filed Chapter 7 petitions for Lori B. Pigg and Jessica L. Harkins.
The Office of the United States Trustee (UST) filed motions for disgorgement and sanctions against Mr. McCrary in both the Pigg and Harkins cases. The UST alleged that Mr.McCrary violated his duties under 11 U.S.C. § 707(b)(4) when he certified that the Pigg and Harkins schedules and statements were accurate, despite knowing that certain nonexempt assets and avoidable transfers had not been disclosed. The UST alleged that Mr. McCrary's knowing failure to schedule nonexempt assets and to list avoidable transfers, among other failures, not only violated his duties under § 707(b)(4), but also warranted disgorgement of his attorney fees and imposition of a monetary penalty as a sanction.
The Court consolidated the two motions for a final, evidentiary hearing. Before the final hearing, the Court on its own motion issued an order to show cause ("OSC") in the Harkins case why additional sanctions should not be imposed. At the conclusion of the hearing, the Court took the matter under advisement. The Court has jurisdiction over these proceedings under 28 U.S.C. § 1334(b) and the proceedings are core. 28 U.S.C. § 157(b)(2)(A). The facts of each motion and the OSC will be addressed in turn.
On February 27, 2015, Lori Pigg called Mr. McCrary's office and spoke to him about filing bankruptcy. His handwritten notes from the conversation as supplemented by a staff member were admitted into evidence without objection.2 The notes indicate that Ms. Pigg hadreceived a $10,000 tax refund,3 had sent a $2,000 check to "Rainbow," and that Mr. McCrary advised her to stop payment on the check to "Rainbow" if possible.
Mr. McCrary electronically filed a voluntary petition for Chapter 7 relief for Ms. Pigg on May 30, 2014, or approximately three months after she first contacted him. The petition was e-signed4 by Mr. McCrary, and states below his signature: "In a case in which § 707(b)(4)(D) applies,5 this signature also constitutes a certification that the attorney has no knowledge after an inquiry that the information in the schedules is incorrect." When filing the petition, Mr. McCrary also certified to the Court that he had executed the Rights and Responsibilities Agreement ("RRA") pursuant to Local Rule ("L.R.") 2016-1.D.6 Mr. McCrary's Rule 2016(b) statement filed with the petition disclosed that he had agreed to charge Ms. Pigg $1,300 for his legal services for filing a Chapter 7 bankruptcy. See Fed. R. Bankr. P. 2016(b). Ms. Pigg's statement of financial affairs ("SOFA") disclosed that she paid Mr. McCrary $1,300 in March 2014.7
Ms. Pigg's Schedule B revealed she had $10 in cash, $100 in a bank account, and minor personal property of minimal value, including $1,200 in household goods and furnishings. Her Schedule F disclosed that she owed $2,000 to a law firm collecting on account of a Rainbow Vacuum,8 and her SOFA disclosed the $1,300 paid to Mr. McCrary's law firm in March 2014. Notably, however, Ms. Pigg listed no payments to or for the benefit of creditors or insiders in response to SOFA Questions 3.a and b, and no transfers outside the ordinary course under SOFA Question 10.a.
In reality, however, Ms. Pigg had received and deposited into her bank account federal and state tax refunds totaling $10,355 within the 90 days before she filed bankruptcy. Ms. Pigg had not only used the tax refunds to pay Mr. McCrary's attorney fees, but had also paid $3,654.53 for the benefit of one of her mother's creditors, Putnam County State Bank, and $2,000 to repay a loan to her sister. As will be discussed in more detail below, Mr. McCrary has admitted that he knew about the tax refunds and the payments to the family members before he filed Ms. Pigg's bankruptcy petition, schedules and statements, and that he advised her not to disclose the transfers.
Bruce E. Strauss was duly appointed as Chapter 7 Trustee in Ms. Pigg's case. On July 6, 2014, he requested the Court issue an OSC for Ms. Pigg's failure to provide the most recent tax returns to him before the § 341 meeting of creditors. Mr. McCrary responded to the OSC, asserting that a staff person had tried to timely upload the documents to the Trustee's document collection system but was apparently unaware that the upload had failed. Mr. McCrary also alleged that the Trustee had received the tax returns on or about July 9. In the meantime, though, the initial meeting set for July 11, 2014 had to be continued another three weeks, to August 1, since the Trustee did not have the returns in time to review them before the meeting.9
Ms. Pigg and Mr. McCrary both attended the continued meeting of creditors on August 1. In Mr. McCrary's presence, the Trustee asked Ms. Pigg under oath if she had any changes or corrections to her schedules or statements. Ms. Pigg testified there were none. Mr. McCrary did not correct her testimony.
Later in the hearing, the Trustee asked Ms. Pigg how she had been able to pay her attorney fees. Ms. Pigg answered that the funds came from her tax refunds. That answer prompted the Trustee to ask what Ms. Pigg had done with the rest of her tax refund money. Ms. Pigg truthfully responded that she had paid her mother and sister. The Trustee then asked Ms. Pigg to amend her SOFA to disclose these transfers. But when another three weeks passed without the SOFA amendments having been filed, the Trustee was compelled to file a motion to extend his time to object to Ms. Pigg's discharge. The Court granted the Trustee's motion, extending the deadline for another 30 days, from September 12 to November 8, 2014.10
A month later (or about 90 days after the case was filed), Mr. McCrary filed Ms. Pigg's amendments to the SOFA, disclosing for the first time the extent and nature of the transfers she had made with her tax refunds. The amendments detail not only the transfers to Ms. Pigg's mother and sister, but other previously undisclosed transfers within the 90 days before filing as well.11
Based on the amendments, the Trustee filed adversary complaints against Ms. Pigg's mother and sister (Adversary Nos. 14-5018 and 14-5019), seeking to recover the transfers as insider preferences under 11 U.S.C. § 547(b). The Trustee ultimately obtained default judgments of $3,654.53 and $1,90012 against Ms. Pigg's mother and sister respectively, in addition to court costs and prejudgment interest. The Trustee represented to the Court at the sanctions hearing that Ms. Pigg's sister was making small monthly payments toward satisfaction of the judgment against her, but that the judgment against Ms. Pigg's mother was essentially uncollectible.
In the meantime, the extended deadline for the Trustee to object to Ms. Pigg's discharge expired, and Ms. Pigg received her discharge. At the sanctions hearing, the Court questioned the Trustee about why he had not filed an objection to Ms. Pigg's discharge for her false testimony and failure to disclose the transfers made with the tax refunds in her original SOFA. The Trustee candidly acknowledged that although Ms. Pigg deserved some blame for the false schedules and testimony, he believed Ms. Pigg was an unsophisticated young woman who had relied on Mr.McCrary. The Trustee based this belief on the fact that Ms. Pigg did not attempt to evade the Trustee's questions about the refunds, and that she had been cooperative with him once she found out what information he wanted. The Trustee therefore did not believe an objection to Ms. Pigg's discharge would be appropriate under the circumstances. There was no evidence before the Court on the issue of Ms. Pigg's intent in not disclosing the transfers initially; the Court otherwise has no reason to disagree with the Trustee's decision not to object to Ms. Pigg's discharge.
The UST examined Ms. Pigg pursuant to Fed. R. Bankr. P. 2004, and then filed a motion for disgorgement and sanctions against Mr. McCrary. The Motion cited testimony during Ms. Pigg's Rule 2004 examination that she told Mr. McCrary - before she filed bankruptcy - about the repayments to family members. And that she had provided Mr. McCrary copies of her bank statements showing the payments. The UST alleged that despite this knowledge, Mr. McCrary failed to properly advise Ms. Pigg about the receipt and expenditure of the tax refunds; failed to disclose the payments from the refunds to the family members and other creditors on the SOFA; failed to advise Ms. Pigg that the transfers could be recovered by the Trustee; and failed to amend the schedules until after the Trustee discovered the transfers. The UST sought disgorgement of...
To continue reading
Request your trial