Sanctions? Are they a reality?

Posted by Kevin on November 10, 2010 under Bankruptcy Blog | Be the First to Comment

There has been a lot of press in the last month about so-called “robo-signers” and false affidavits being submitted in both bankruptcy and foreclosure matters.  What are the courts doing to combat this?

Many commentators talk in terms of the courts’ right to impose sanctions (usually translated into monetary fines and payment of the non-offending party’s legal fees) but the fact of the matter is that courts are reluctant to impose sanctions.

In the case of In Re Butler, which was a Chapter 13 case in New Jersey, a credit union filed for relief from the automatic stay claiming that the debtors had missed 18 monthly payments on its SUV.  The debtors provided proof to the court, by bank statements and wire transfer authorizations, that all payments but one were made.  The hearing was postponed.  During the interim, the credit union withdrew its motion.

The debtor was forced to incur additional legal fees in opposing the motion in addition to their own lost time and aggravation.  The court denied the debtors’ request for sanctions.

In the bankruptcy court, you can seek sanctions under Rule 9011.  Rule 9011 requires that submissions to the court must be signed by attorneys who are, in effect, certifying that to the best of the attorney’s knowledge and formed after reasonable inquiry, the document is not being presented to the court for an improper purpose.  However, to get the benefit of Rule 9011 sanctions, the aggrieved party must send to the offending party a letter pointing out the offending document and requesting that the offending party remove the document from the court within 21 days.

In this case, the Butler’s did not send the 21 day notice letter.  So based on Rule 9011, they were SOL.

The court then pointed out that bankruptcy courts have inherent powers to sanction improper behavior  but they must be exercised with restraint and discretion.  Mere recklessness in filing papers is insufficient to justify sanctions.

Based on the fact that the credit union withdrew its motion as soon as it was confronted with information that its moving papers were false, the court found the credit union to be negligent at worst and not in bad faith.  Therefore, sanctions were not warranted.  The court acknowledged that the debtors were put out, but said that it was important to strike a workable balance between providing relief for aggrieved parities while not punishing offenders for “infrequent and genuine mistakes that occur as a result of the human condition”.

Bottomline is that a game playing creditor will be given the benefit of the doubt- at least for the first transgression.  But that does not mean that a debtor should give the offending creditor a pass.  Be vigilant.  Send that 21 day letter.  Follow up with the court.  Maybe two or three offending pleadings turns negligence into bad faith.