Bankruptcy Advice Sanction Affirmed

The United States Court of Appeals for the Fourth Circuit has affirmed sanctions imposed on an attorney in a bankruptcy matter.

The client had sold her residence without prior court approval in a confirmed Chapter 13 plan

we conclude that the court did not err in holding that  the sale violated the Plan and affirm its decision to impose monetary sanctions against Sasser. But we vacate and remand the judgment against [client]  Sugar so that the bankruptcy court can consider the effect of record evidence that she acted on advice of counsel as part of its decision about the appropriate remedy for Sugar’s conduct and to explain why it determined that a remedy short of dismissal would fail to adequately redress what happened. Given the particular harshness of dismissal that was then augmented by the sanction of a five-year filing bar, an explanation accounting for the totality of the circumstances is required before any consequence can be imposed as to Sugar.

Attorney sanction

In contrast to Sugar, Sasser bears full responsibility for his actions advising Sugar incorrectly in this case. The record ably supports that the bankruptcy court did not abuse its discretion in sanctioning him with a fine of $15,000. Notably, Sasser’s chief argument in opposing the order against him is to reiterate that the sale of Sugar’s residence did not violate the Local Rule. But we have previously rejected that argument.

The record shows that Sasser has been a licensed member of the bar for over two decades, and has practiced consumer bankruptcy law in North Carolina for most of that time. He has appeared in numerous Chapter 13 bankruptcy cases not just in the Eastern District of North Carolina, but before the same bankruptcy judge presiding over Sugar’s Chapter 13 proceeding. The bankruptcy court reasonably held Sasser responsible for understanding his client’s confirmed Plan, including the numerous rules that governed his client’s conduct. Further, he was reasonably held responsible for knowing case law from this Court and the bankruptcy court regarding how those rules applied to his client.

Of particular concern leading to the bankruptcy court’s determination was Sasser’s advice to Sugar he knew to be wrong based on a prior decision by the same bankruptcy judge interpreting the scope of the Local Rule in similar circumstances in a case in which Sasser represented the debtor. In re Pulliam, No. 19-03887-5-DMW, 2020 WL 1860113 (Bankr. E.D.N.C. Apr. 13, 2020). The court’s ruling in that case informed Sasser of numerous legal rulings that rejected identical arguments (and variants of arguments) he made in that case, and that he later made in Sugar’s case regarding whether the Local Rule applied to vested property, the scope of North Carolina’s Homestead Exemption, and the effect of paying off an unpaid balance due on the Plan when the Plan’s applicable commitment period had not ended. Whatever Sasser’s views of the propriety of the bankruptcy judge’s decision in Pulliam, he did not challenge it in an appeal. Nor did he preemptively raise these arguments as grounds for not requiring Sugar to obtain a court order before she attempted to sell her residence.1Instead, he waited to raise his arguments against the applicability of the Local Rule to the sale of Sugar’s residence only after advising his client in a manner inconsistent with the Plan and only after Sugar had sold her property without a court order. Further, his advice fell well after this Court and the bankruptcy judge presiding over Sugar’s case had both expressed prior interpretations of at least some of the relevant provisions that were contrary to Sasser’s position. That obstinate conduct demonstrates the requisite willfulness and bad faith on Sasser’s part to support the bankruptcy court’s decision to sanction him under § 105(a), its inherent contempt authority, and Local Bankruptcy Rule 9011-3.13

Relatedly, the docket in Sugar’s Chapter 13 proceeding also demonstrates that Sasser had reasonable notice that the Local Rule would apply to the sale. As just two examples, the Bankruptcy Administrator filed the motion for a status conference directly in response to the potential sale of the residence without a prior court order and Sasser decided to file a motion for a court order authorizing the sale that he later withdrew. Thus, the concern about the Local Rule’s applicability had been flagged in advance of the sale.

In affirming the bankruptcy court’s sanction order against Sasser, we want to be clear that attorneys are called to diligently represent their client’s interests and that fulfilling this duty does not immediately expose them to potential sanctions. Attorneys can and should advance viable positions with uncertain and unsuccessful outcomes or encourage changes in the law in a manner that is consistent with the court’s rules and the proper times for doing so. But that is not the type of conduct that formed the basis of the bankruptcy court’s sanctions against Sasser. Here, the court cited Sasser’s reckless advice to his client in the face of numerous signals—including from the judge presiding over Sugar’s proceeding—indicating that he was incorrectly advising her that the Local Rule did not apply to the sale of her residence and she did not need a court order before proceeding. Nevertheless, Sasser persisted, advising his client in a manner that was contrary to the law and against his client’s interests.

Because the record fully supports the bankruptcy court’s determination that Sasser willfully advised his client to violate the Local Rule and there was “no fair ground of doubt” as to whether the Plan and the Local Rule permitted the sale of Sugar’s residence without a prior court order, we affirm the order of monetary sanctions against Sasser. Taggart, 587 U.S. at 557 (emphasis omitted).

(Mike Frisch)