Sanctions — Bad Faith of Client Cannot be Imputed to Lawyer Who Is Merely Negligent — Notable Quotes

From Harris v. U.S. Trustee (In re Aston-Nevada LP), 409 F. App'x 107 (9th Cir. 20100:

In this case, some of Appellants' actions, viewed objectively, were negligent. As the bankruptcy court found, Chapman should have reviewed the bankruptcy petition and inquired into the estate's assets before agreeing to represent Aston-Nevada in bankruptcy court. Chapman should have accessed PACER, which he admitted to having in his office, to view the petition and other papers if he could not get them from Rogers. He should have become familiar with the underlying state court case, realized that Aston-Nevada only had one asset and one creditor, and moved to dismiss the Chapter 11 case without opposing Silver State Bank's motion for relief from the stay. He should have ascertained in meeting with Rogers for over an hour that Rogers had filed for bankruptcy for the improper purpose of forestalling the underlying state court case. Chapman was undoubtedly sloppy in his handling of this case.

However, the bankruptcy court did not stop by finding that Appellants acted negligently. The bankruptcy court also found that they acted in bad faith and imposed sanctions based on this finding. ***

In defending Rogers and Aston-Nevada with respect to Silver State Bank's sanctions motion, the evidence supports a finding that Chapman attempted to argue that Rogers' conduct, while improper, was not sanctionable because Rogers subjectively believed that he was doing the right thing to protect himself from what he saw as a conspiracy against him. *** Chapman may have been negligent under the circumstances, but the facts do not support a finding of bad faith.***

The bankruptcy court similarly skewed other facts against Appellants, including their failure to engage a bankruptcy trustee as the debtor originally suggested in his petition. The evidence shows that Appellants immediately sought to dismiss the case after the hearing on the motion for relief from stay rather than waste time and money engaging a trustee. The bankruptcy court even characterized Chapman's motion to dismiss filed on August 25, 2004, the day after the hearing on Silver State Bank's motion for relief from the stay, as an example of his bad faith. Again, the record does not support such a finding. Instead, the evidence shows that Appellants' motion was a hasty effort to get the case out of bankruptcy court and back to state court where it belonged. In all, considering the facts as they were presented to the bankruptcy court, the evidence does not support a finding of bad faith on the part of Appellants. It strains reason to find that an attorney who agrees to represent a client, learns within a few days that the client's position lacks merit, and seeks to dismiss the action the next day, acts in bad faith. It is equally untenable that an attorney who argues that his client should not be sanctioned is necessarily condoning the action of his client. There is a difference between ratifying a client's conduct and simply arguing that, while improper, the conduct in question was not sufficiently improper to warrant sanctions. On the facts as presented, it may be perfectly fair to conclude that Rogers, Aston-Nevada, and LeVillier acted in bad faith and with improper purpose when they filed the Chapter 11 case, seemingly to stave off the underlying state court action, and continued to play fast and loose with the court and their attorneys. But, it is entirely different to impute that bad faith and improper purpose to a careless attorney and his entire firm. Consequently, we must conclude that the bankruptcy court abused its discretion in imposing the sanctions that it did in this case because "it based its ruling on . . . a clearly erroneous assessment of the evidence."

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