The Bankruptcy Panel for the Sixth Circuit Court of Appeals has ruled that a bankruptcy judge from the Western District of Tennessee abused his discretion by imposing sanctions in the form of attorney’s fees and expenses related to a debtors’ bankruptcy case and related litigation.
In the summer of 2008, the debtors signed an engagement letter with a non-bankruptcy attorney (“Appellant”), assigning their interest in $20,000, then held by a Circuit Court, as payment for his representation in another action. The attorney then referred the debtors to a bankruptcy lawyer. The bankruptcy lawyer filed a chapter 7 bankruptcy petition, which failed to disclose several trusts and the pre-petition $20,000 assignment to the Appellant.
In April, 2010, creditors in the bankruptcy proceedings moved for partial summary judgment, which the debtors opposed. In February, 2011, the bankruptcy court granted in part and denied in part the summary judgment motion. The Debtors then filed a Motion to Alter or Amend the Judgment, supported by affidavits of the Appellant and the bankruptcy lawyer.
In January, 2012, the bankruptcy court issued an Order, granting a motion for derivative standing to permit the Creditors to file a legal malpractice action against the Appellant and the bankruptcy attorney. The Creditors filed their action and a motion for sanctions. The lower court granted the motion for sanctions, determining that Appellant had acted as lead counsel, even though his name was not on all the filings. The Appellant, but not the bankruptcy lawyer appealed.
The Appellate Panel reversed because the motion had not been served on the opposing party within twenty-one (21) days of being filed with the court. Here, it was not the Appellant, but the bankruptcy lawyer who had signed and filed the debtors’ bankruptcy petition.
The Sixth Circuit Panel also found that sanctions under 28 U.S.C. § 1927 were not appropriate because there was no indication that Appellant had “stepped beyond the role of a zealous, if misguided, advocate”, or prolonged the litigation by his filings. Therefore, the Order granting the Creditors’ motion for sanctions entered by the Bankruptcy Judge was vacated to the extent that it imposed sanctions against Appellant.
This case is: In re Earl Benard Blasingame; Margaret Gooch Blasingame