Summary
stating that "[g]ratuitous payments from third parties 'motivated solely by generosity' do not typically constitute 'regular income' "
Summary of this case from Ansin v. Ansin (In re Ansin)Opinion
No. 98 CV 6205
November 8, 1999
MEMORANDUM AND ORDER
Appellant Mary Mercedes Marti, Esq. brought this appeal from an order imposing sanctions upon her entered by the Bankruptcy Court for the Eastern District of New York, Holland, J. The court has appellate jurisdiction over the bankruptcy order under 28 U.S.C. § 158(a).
I.
The record in substance reveals the following. Beginning in May of 1997, Marti represented Gregory Jones in connection with real estate owned by Jones in Rosedale, New York (the "Rosedale property"). At the time, Jones was incarcerated in the Eastern New York Correctional Facility at Napanatch, New York.
Jones owned the property subject to a mortgage held by Greenpoint Bank ("Greenpoint"). In October of 1997, Jones and Marti learned that Greenpoint had initiated a foreclosure action on Jones' property in New York Supreme Court. The bank scheduled an auction sale of the property for January 9, 1998.
On an unspecified date in late 1997, Jones arranged to sell the Rosedale property to a private third party (the "arms-length sale"). The parties signed a contract on January 6, 1998, with a closing to take place on or before February 15, 1998.
On December 16, 1997, Marti visited Jones in prison to discuss how they might avoid foreclosure on the Rosedale property if the arms-length sale did not close before the auction date. They discussed two options: seeking to block the auction in state court; and filing for Chapter 13 bankruptcy in federal court.
On January 8, 1998, Marti filed an Order to Show Cause in New York Supreme Court seeking an order vacating the judgment of foreclosure and a temporary restraining order blocking the auction. On January 8, 1998, the Supreme Court declined to issue a temporary restraining order.
As agreed with Jones in their meeting of December 16, 1997, Marti had also prepared a Chapter 13 petition. Marti said she made clear to Jones that funding a bankruptcy plan would require a steady source of income. Jones told her he expected to be paroled in "early 1998" and had been offered a job upon his release, and that in the interim a relative would make any necessary payments. He confirmed this information in a telephone conversation with Marti on January 8, 1998.
Marti filed a Chapter 13 petition in the United States Bankruptcy Court for the Eastern District of New York on January 9, 1998, just over an hour before the foreclosure sale was scheduled to take place. Pursuant to 11 U.S.C. § 362 (1999), the filing triggered an automatic stay of the foreclosure. Marti, Jones, and the prospective buyer of the Rosedale property then amended the contract of sale to make it subject to the approval of the Bankruptcy Court.
Marti did not include with the petition a proposed reorganization plan as required by 11 U.S.C. § 1326 (1999). On January 26, 1998, Marti moved for an extension of time to file a plan to complete her "skeleton petition." She also asked the bankruptcy court to approve the amended contract for the arms-length sale.
On February 19, 1998, the bankruptcy trustee, Michael J. Macco, held the first creditors' meeting pursuant to 11 U.S.C. § 341. Jones himself did not attend, but his father, Curtis Jones, appeared with a power of attorney as Jones' agent. Macco found Curtis Jones to be unprepared and adjourned the proceedings to allow Curtis Jones to gather more information.
On March 3, 1998, United States Bankruptcy Judge Marvin A. Holland held a hearing on Jones' motions for approval of the contract and for an extension of time to file a reorganization plan. Bankruptcy Judge Holland denied both motions. He found the application for an extension to be untimely, although at a subsequent hearing he concluded that he had miscalculated the relevant dates and that the application was timely.
Also at the March 3, 1998 hearing, Macco moved for sanctions against Marti under Rule 9011. Macco alleged that Marti had filed the bankruptcy petition solely to stay the foreclosure auction until the arms-length sale could be concluded. Bankruptcy Judge Holland adjourned the sanctions proceedings until April 7, 1998.
At a hearing on April 7, 1998, Bankruptcy Judge Holland moved sua sponte to sanction Marti under 28 U.S.C. § 1927. He adjourned the proceedings until May 12, 1999 to give Marti time to respond to the motion.
On May 10, 1998, Marti filed on Jones' behalf an application to withdraw voluntarily the Chapter 13 petition.
At a hearing in May 12, 1998, the parties and Bankruptcy Judge Holland agreed in principle to establish a reorganization plan funded by the proceeds of the arms-length sale, which was by then ready to close. Bankruptcy Judge Holland also continued his inquiry into Marti's allegedly sanctionable conduct, but adjourned that question until June 16, 1998.
Jones subsequently refused to accept the reorganization plan proposed at the May 12 hearing. In an order dated June 15, 1998, the bankruptcy court granted Jones' earlier motion to dismiss the case without prejudice.
On August 10, 1998, Bankruptcy Judge Holland issued an order sanctioning Marti under Rule 9011 in the amount of $2,500. Bankruptcy Judge Holland did not levy sanctions under 28 U.S.C. § 1927. The bankruptcy court listed three grounds for awarding sanctions under 9011: (1) that Marti failed to make reasonable inquiry into the facts and law prior to filing the petition; (2) that the sole purpose in filing the petition was to delay the foreclosure sale; and (3) that Marti intended to withdraw the petition as soon as the arms-length sale was completed.
Bankruptcy Judge Holland did not specify the factual or legal basis for his conclusions. But the trustee had alleged several grounds for sanctions, most prominently that Marti filed the Chapter 13 on Jones' behalf petition solely to "buy a stay" — that is, to avert foreclosure — with no intention of reorganizing under Chapter 13. The trustee stressed that Marti filed the petition the day after the state court declined to stay the foreclosure and less than two hours before the foreclosure was to occur. He also noted that Marti stated in her motion for approval of the arms-length contract that she would withdraw the petition if the court approved the contract.
Bankruptcy Judge Holland had also closely questioned Marti on several apparent procedural irregularities, including Marti's failure to file a proposed reorganization plan, Jones' failure to appear at a preliminary status conference with the trustee, and Jones' lack of income to finance a plan.
Marti filed a notice of appeal from the sanctions order on August 20, 1998. This court held a hearing on March 26, 1999, at which Macco failed to appear.
II.
This court reviews the bankruptcy judge's award of sanctions for an abuse of discretion. Matter of Cohoes Industrial Terminal, Inc., 931 F.2d 222, 227 (2d Cir. 1991).
A.
Federal Rule of Bankruptcy Procedure 9011 provides that an attorney's signature on a bankruptcy petition certifies that the attorney has conducted "an inquiry reasonable under the circumstances," that the petition "is not being presented for any improper purpose," and that the petition is "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law."
The court applies an objective standard in determining whether to levy sanctions. Sussman v. Bank of Israel, 56 F.3d 450, 458-59 (2d Cir. 1995). Even sanctions based on lack of good faith inquiry or improper purpose must be supported by a threshold finding that the petition is frivolous. Id. (improper purpose); In re Baumblit, 229 B.R. 50, 66 (Bankr.E.D.N.Y. 1999) (reasonable inquiry).
A bankruptcy petition is frivolous under Rule 9011 if it is "patently clear that [it] has absolutely no chance of success," Sussman, 56 F.3d at 457; see Matter of Cohoes Industrial Terminal, Inc., 931 F.2d 222, 227 (2d Cir. 1991), or "if it is clear that on the filing date there was no reasonable likelihood that the debtor intended to reorganize." Matter of Cohoes Industrial Terminal, Inc., 931 F.2d at 228. The latter finding is warranted "if, upon considering the totality of the circumstances, there is substantial evidence to indicate that the debtor made a bad faith filing." Id.
In determining the appropriateness of sanctions, "the court is to avoid hindsight and resolve all doubts in favor of the signer" of an allegedly frivolous filing. In re Mergenthaler, 144 B.R. 632, 635 (Bankr.E.D.N.Y. 1992) (Holland J.) (citing Olivieri v. Thompson, 803 F.2d 1265, 1275 (2d Cir. 1986)).
B.
None of the issues raised during the hearings supports an award of sanctions under Rule 9011. Marti neither advanced a legally frivolous petition nor filed the petition in bad faith.
Legally Frivolous
The only pertinent issue of law raised at the hearings before the bankruptcy court was whether Jones could qualify as a debtor under Chapter 13. Only an "individual with regular income" is eligible to file a Chapter 13 bankruptcy petition. 11 U.S.C. § 109(e). The Bankruptcy Code defines an "individaul with regular income" as one "whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13." 11 U.S.C. § 101(30).
Gratuitous payments from third parties "motivated solely by generosity" do not typically constitute "regular income" for purposes of the Bankruptcy Code. Id. at 19-20. But courts have found even unemployed persons eligible for Chapter 13 bankruptcy where family members or other parties are under a duty to make contributions. See id. (citing cases); In re Campbell, 38 B.R. 193, 195-96 (Bankr.E.D.N.Y. 1984). In addition, courts have held that eligibility determinations should be based on prospective income rather than income at the time the petition is filed. See In re Bradley, 18 B.R. 105, 106 (Bankr.D.Vt. 1982); In re Mozer, 1 B.R. 350, 352 (Bankr. Col. 1979).
Before she filed a Chapter 13 petition on Jones' behalf, Marti discussed Jone's eligibility with him. Jones said he expected to be paroled within months after the petition was signed, had been offered a job upon his release, and had received commitments from relatives to make payments in support of a bankruptcy plan until Jones could make them himself.
Marti thus could argue in good faith that, under existing precedent or a modest extension thereof, Jones was eligible as a debtor on the basis of future income and the interim contributions of relatives. Indeed she made this argument in an affidavit filed with the bankruptcy court on April 1, 1998. At the hearing of April 7, 1998, Judge Holland, who stated he had not read counsel's submissions, flatly rejected Marti's arguments.
Because it cannot be said that the petition submitted by Marti had "no chance of success under existing precedents," Marti cannot be sanctioned under Rule 9011 for advancing a legally frivolous claim or failing to conduct a reasonable inquiry before filing. Matter of Cohoes Industrial Terminals, Inc., 931 F.2d at 227.
Bad Faith
Bankruptcy Judge Holland concluded without elaboration that the sole purpose of filing the petition was to delay the foreclosure auction and that Marti intended to withdraw the petition as soon as the arms-length sale was closed. In arguing for sanctions, the trustee had cited several facts purportedly demonstrating Marti's bad faith. These included the timing of the filing, Marti's subsequent statement that she would withdraw the petition once the court approved the arms-length contract, Jones' failure to appear in person at the creditors meeting, and Marti's failure after the petition was filed to submit schedules or otherwise move toward reorganization.
None of these issues demonstrates improper purpose. The timing of Marti's filing — one day after failing to block the foreclosure in state court and just hours before the foreclosure was to take place — does not, by itself, prove that she acted in bad faith. It is true that filing a Chapter 13 petition solely in order to frustrate creditors or avoid immediate foreclosure may be sanctionable. See In re Barnes, 231 B.R. 482, 485 (Bankr.E.D.N.Y. 1999). But "there is a considerable gap between delaying creditors . . . on the eve of foreclosure and the concept of abuse of judicial purpose." Matter of Cohoes Industrial Terminal, Inc., 931 F.2d at 228. As noted, allegations of "improper purpose" are judged objectively. The party seeking sanctions must show concrete evidence of bad faith, such as "serial" bankruptcy filings on the eve of foreclosure, see In re Casse, 219 B.R. 657 (Bankr.E.D.N.Y. 1998), or absence of serious financial difficulty. Matter of Cohoes Industrial Terminal, Inc., 931 F.2d at 228. Sanctions are inappropriate to "penalize the assertion of non-frivolous substantive claims, even when the motives for asserting those claims are not entirely pure." Sussman v. Bank of Israel, 56 F.3d 450, 459 (2d Cir. 1995). See Banque de Financement, S.A. v. First National Bank, 568 F.2d 911, 917 (2d Cir. 1977) (filing bankruptcy petition with intent to frustrate creditors does not, by itself, "establish an absence of intent to seek rehabilitation.") Macco made no showing here that the petition filed Marti was substantively meritless.
The remaining issues raised by Macco and the bankruptcy court all concern Marti's conduct after the petition was filed. Because the propriety of sanctions is determined as of the filing date "[t]he Court must not allow hindsight to skew its judgment." United States v. International Bhd. of Teamsters, 948 F.2d 1338, 1344 (2d Cir. 1991).
To the extent that Marti's post-filing conduct is relevant, it does not support a finding of bad faith. For instance, Marti's offer to withdraw the petition upon the court's approval of the contract does not prove she never intended to pursue reorganization. That statement merely reflected Jones' desire to sell his property at arms length rather than enter bankruptcy, and the financial reality that if the sale was completed Jones would no longer be insolvent.
Marti's failure to file a proposed reorganization plan pursuant to 11 U.S.C. § 1326 (1999) also fails to warrant the imposition of sanctions. Marti applied on January 26, 1998 for an extension of time to file a plan. The court rejected her application as untimely at the March 3 hearing but later acknowledged that the application was timely filed. Having been denied permission to file a plan beyond the deadline, Marti cannot be sanctioned for failing to do so.
Jones did fail to appear at the first creditors' meeting on February 19, 1998. While 11 U.S.C. § 343 states that the debtor "shall appear" at the § 341 creditors' meeting, courts may waive personal appearance when for good cause the debtor cannot appear. See In re Sullivan, 30 B.R. 781 (Bankr.E.D.Pa. 1983); In re Steward, 14 B.R. 959 (Bankr.N.D.Ohio 1981). Jones was incarcerated at the time of the meeting. Jones' father, armed with a power of attorney, attended the meeting as Jones' agent. Marti had previously represented clients for whom courts had waived the personal appearance requirement, and had researched the issue before the February 19, 1998 creditors' meeting. She cannot be sanctioned for failure to produce Jones in person.
In short, the facts cited by the trustee do not support the requisite threshold finding that "there was no reasonable likelihood that the debtor intended to reorganize." Matter of Cohoes Industrial Terminal, Inc., 931 F.2d at 228.
III.
The bankruptcy court's award of sanctions against Marti is reversed.
So ordered.