In re Smith, Bankruptcy No. 02-81180-WRS.

• Decision Date: 25 February 2004
• Docket Number: Bankruptcy No. 02-81180-WRS.,Adversary No. 02-8029-WRS.
• Citation: 306 B.R. 5
• Parties: In re Barbara SMITH, Debtor. Barbara Smith, Plaintiff, v. Homes Today, Steve Stutts, et al., Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Alabama

306 B.R. 5

In re Barbara SMITH, Debtor Barbara Smith, Plaintiff, v. Homes Today, Steve Stutts, et al., Defendants.

Bankruptcy No. 02-81180-WRS.

Adversary No. 02-8029-WRS.

United States Bankruptcy Court, M.D. Alabama.

February 25, 2004.

Charles M. Ingrum Jr., Attorney at Law, Opelika, AL, for Plaintiff/Debtor.

Daniel W. Lee, Attorney at Law, LaGrange, GA, for Homes Today Inc. & Steve Stutts.

MEMORANDUM DECISION

WILLIAM R. SAWYER, Chief Judge.

I. Facts

This Adversary Proceeding came before the Court for hearing on February 6, 2004, upon the Court's Order of January 15, 2004, requiring Defendants' counsel Daniel W. Lee to appear and show cause why sanctions should not be imposed. (Doc. 42). Lee was present in person and the Plaintiff was present by counsel Charles Ingrum. Before addressing the specifics of the order to show cause, the Court will review the history of this Adversary Proceeding.

In this Adversary Proceeding, Plaintiff Barbara Smith sought money damages alleging that Defendants Homes Today and Steve Stutts wrongfully repossessed her mobile home in violation of the automatic stay. The matter was tried on May 28, 2003. On July 21, 2003, the Court entered judgment in favor of the Plaintiff in the amount of $58,183.91. (Docs. 30, 31); Smith v. Homes Today, 296 B.R. 46 (Bankr.M.D.Ala.2003). This was a particularly egregious example of a mobile home repossession. The Defendants backed a truck up to the Plaintiff's residence and proceeded to drive away, with the Plaintiff still in the mobile home. The Defendants knew that the Plaintiff had filed bankruptcy and knew that she was in the residence at the time they proceeded to drive away. Moreover, the trial was particularly acrimonious.

Subsequent to entry of judgment, Ingrum began efforts to collect the judgment. In response to a communication from Ingrum Lee wrote Ingrum a letter dated October 10, 2003, which stated that "I am almost certain that Mr. Stutts is still in bankruptcy and would be judgment proof." (Doc. 48, Ex. B). The Defendants failed to respond to post judgment interrogatories and failed to respond to the Plaintiff's Motion to Compel. Neither Lee nor the Defendants appeared at the hearing on the Plaintiff's Motion to Compel.¹ The Court granted the Plaintiff's Motion to Compel and awarded attorney's fees which were imposed against Lee in his personal capacity. (Doc. 41).

In fact, Defendant Steve Stutts was not in bankruptcy. The Court learned of Lee's false statement in its consideration of the Plaintiff's motion to compel. The Court was sufficiently alarmed by this to enter a show cause order to offer Lee an opportunity to show that the demonstrably false statement in his October 10, 2003, letter was not sanctionable. (Doc. 42). From the facts as then known to the Court, it appeared that Lee made a false statement that his client was in bankruptcy, and that his position was that he was not required to respond to the interrogatories or the motion to compel. Given the surrounding facts and circumstances of this Adversary Proceeding, it appeared that Lee knowingly made a false statement in an effort to harass and delay the Plaintiff in her efforts to collect her money judgment.

The matter was heard on February 6, 2004. At the hearing, Lee offered a two-pronged defense. First, he alleged that his client told him that he was in bankruptcy and that his statement, though false, was not known by him to be false at the time he made it. Second, Lee alleged that he did not understand that the false representation was material because he did not regularly practice in bankruptcy court. The Court will first discuss the applicable law which governs here and then it will consider Lee's contentions in order.

II. Law

Lee was admitted to the bar of the United States District Court for the Middle District of Alabama, upon his motion for admission pro hac vice. (Docs. 8, 12). Upon his admission, Lee became subject to the Alabama Rules of Professional Conduct. See Rule 83.1, Local Rules of the United States District Court for the Middle District of Alabama; General Order of the United States Bankruptcy Court for the Middle District of Alabama, dated July 22, 1988, entitled "Order on Admission to Practice;" see also Thomas v. Tenneco Packaging Co., Inc., 293 F.3d 1306, 1320-30 (11th Cir.2002) (trial court has inherent power to sanction errant lawyers); Wade v. Nationwide Mut. Fire Ins. Co., 225 F.Supp.2d 1323, 1327-28 (S.D.Ala.2002) (attorneys practicing in Southern District subject Alabama Rules of Professional Conduct); Nuri v. PRC, Inc., 5 F.Supp.2d 1299, 1302 (M.D.Ala.1998) (lawyers who practice in the Middle District subject to Alabama Rules of Professional Conduct). Therefore, Lee is subject to discipline in this Court for actions taken in connection with this Adversary Proceeding.

Rule 3.4(a) of the Alabama Rules of Professional Conduct provides as follows:

A lawyer shall not: (a) unlawfully obstruct another party's access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value. A lawyer shall not counsel or assist another person to do any such act.

ALA. RULE OF PROF'L CONDUCT R. 3.4(a).

Rule 4.1(a) of the Alabama Rules of Professional Conduct provides follows:

In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person.

ALA. RULE OF PROF'L CONDUCT R. 4.1(a).

The question then presented is whether Lee violated these rules when he falsely stated that his client was in bankruptcy. Lee claims that he did not know that his statement was false when he made it and, in the alternative, that he did not understand it to be material.

III. Application of the Law to the Facts

A. Knowing Misrepresentation

Either one is in bankruptcy, or one is not. The question may easily be resolved by consulting the records of the pertinent court. This Court has previously addressed the question of how a lawyer who represents a debtor who has filed bankruptcy might communicate that fact to a creditor. In re Briskey, 258 B.R. 473 (Bankr.M.D.Ala.2001). At a minimum, the lawyer making the communication on behalf of the debtor should provide the name of the Court, the name of the debtor, the date of filing and the case number. Id. at 479. The October 10, 2003, letter from Lee was deficient in this regard as it stated only that Stutts was in bankruptcy, without providing additional information as to the court in which the case was filed, the case number and date of filing. In response to Lee's October 10 letter, Ingrum wrote to Lee on October 30, 2003, requesting specific information as to the particulars of Stutts alleged bankruptcy filing.² (Doc. 48). Lee did not respond to Ingrum until his letter of December 31, 2003, wherein Lee criticized Ingrum for filing a motion to compel and stated that he no longer represented the Defendants.³ (Doc. 48, Ex. E). Lee's December 31, 2003, letter did not provide any further information regarding the bankruptcy filing. Having carefully considered the surrounding circumstances, having heard Lee in open Court, having observed his demeanor, and having considered his past dealings with this Court, the Court finds that Lee knowingly misrepresented that his client Steve Stutts was in bankruptcy.

B. Materiality of the Misrepresentation

Lee claims that he does not practice regularly in bankruptcy court and therefore did not understand that his statement concerning Stutts' bankruptcy filing was in any way material. There are two responses to this claim. First, given the facts of this case, Lee's claim that he did not understand the materiality of the statement is false. He knew that the statement was material. Indeed, the statement was calculated to harass and delay the Plaintiff's efforts. Second, Rule 4.1(a) does not require that the lawyer making the statement know that it is material, rather all he must know is that the statement is false. One may not properly defend a charge under Rule 4.1(a) by taking the position that he knowingly made a false statement as to a material fact, but that he did not know that the statement was material.

Lee's statement was made in an effort to thwart the Plaintiff's attempt to conduct post judgment discovery. Had Stutts in fact have filed bankruptcy, any efforts to conduct post judgment discovery would have been stayed. 11 U.S.C. § 362(a)(2). Moreover, had Stutts in fact been in bankruptcy, Ingrum's acts of serving interrogatories and filing a motion to compel would have been in violation of the automatic stay. Id. As Lee is well aware, a willful violation of the automatic stay may make one liable for actual and punitive damages. Smith v. Homes Today, 296 B.R. 46 (Bankr.M.D.Ala.2003) (Lee was counsel of record for the Defendants and tried the adversary proceeding in which the Plaintiff was awarded damages in the amount of $58,183.91). By making the statement in his October 10, 2003, letter, Lee intentionally placed Ingrum on the horns of a dilemma. On the one hand, if Ingrum proceeded with collection in violation of the automatic stay, he would be potentially liable for damages. On the other hand, by delaying action, he may have prejudiced his client's interests. Lawyers who claim falsely that their client is in bankruptcy, in an effort to delay collection activity, harm the orderly administration of the bankruptcy process as much as those who willfully violate the automatic stay by taking collection action in violation of the automatic stay.⁴

The bankruptcy system depends upon the integrity and good faith of those lawyers who practice bankruptcy law. More than one and one-half million bankruptcy cases are filed every year. In almost every case, the debtor has multiple creditors, sometime hundreds or even thousands of creditors, all of whom are affected in some way by the automatic stay. Counsel acting diligently and in good faith should be able to determine...