Rule 11 (or 9011) Sanctions — Misstatements or Omissions of “Litigation Facts” — Limits on Duty to Investigate

From In re Brent, 2011 Bankr. LEXIS 3668 (Bankr. N.D. Ill. Sept. 29, 2011):

Timothy K. Liou is one of the most active consumer bankruptcy attorneys in this district, filing nearly 8,000 cases from mid-1996 to the present. More than once, though, Liou's efforts to get paid have drawn the court's attention and resulted in sanctions. Now he faces sanctions again. Earlier this year, seven bankruptcy judges issued orders asserting that Liou had filed false applications for compensation as counsel for the debtors in 317 pending chapter 13 cases. The applications were false, the orders said, because in them Liou represented that he had entered into the court's form retention agreement with the debtor, entitling him to receive a fixed fee of $3,500 (a "flat" or "no look" fee), when in fact he had modified the agreement to charge additional fees. The orders required him to show cause why he should not be sanctioned for violating Bankruptcy Rule 9011(b).

The Rule 9011 proceedings were consolidated for hearing before the undersigned judge. *** For the reasons discussed below, Liou will be sanctioned for his multiple misrepresentations to the court in violation of Rule 9011(b).***

Rule 9011 is the bankruptcy equivalent of Rule 11 of the Federal Rules of Civil Procedure. In re Excello Press, Inc., 967 F.2d 1109, 1111 (7th Cir. 1992); In re Collins, 250 B.R. 645, 659 (Bankr. N.D. Ill. 2000).

Footnote 9. Because the rules are largely the same, case law under Rule 11 is helpful in the interpretation of Rule 9011. Collins, 250 B.R. at 659 (stating that "Rule 11 precedents may be applied to make decisions under Rule 9011").

Under Rule 9011(b), an attorney or unrepresented party who presents to the bankruptcy court any "petition, pleading, written motion, or other paper" makes four certifications to the court. Three are certifications that the paper is not presented for an improper purpose, the legal contentions have a basis in the law, and the denials of facts are warranted by the evidence. Fed. R. Bankr. P. 9011(b)(1)-(2), (4). The fourth, relevant here, is a certification that "the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Fed. R. Bankr. P. 9011(b)(3).

The certification in Rule 9011(b)(3) prohibits not only assertions of fact without sufficient support but also outright misstatements of fact, whether about the merits or about the case itself - so-called "litigation facts" of which counsel has first-hand knowledge. "It does not matter what the subject of a misstatement is. It is sanctionable to mislead the court." Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse § 9(F) at 2-134 (4th ed. 2008); see also Georgene M. Vairo, Rule 11 Sanctions: Case Law, Perspectives and Preventive Measures 337 (3d ed. 2004) ("Misrepresentations of the facts may obviously result in sanctions."); see, e.g., Brandt v. Schal Assocs., Inc., 960 F.2d 640, 651 (7th Cir. 1992); Samuels v. Wilder, 906 F.2d 272, 276 (7th Cir. 1990). Misleading omissions of fact are equally sanctionable. Joseph, supra, § 9(G) at 2-137; Vairo, supra at 338; see, e.g., In re Ronco, Inc., 838 F.2d 212, 218 (7th Cir. 1988).

To be sanctionable, a misstatement or omission must be more than an innocent mistake; in making the misstatement or omission, the attorney must have been "culpably careless." Young v. City of Providence ex rel. Napolitano, 404 F.3d 33, 39 (1st Cir. 2005); see also Joseph, supra, § 9(F) at 2-136. The test for carelessness is objective rather than subjective. To avoid sanctions, then, the attorney's conduct must have been the conduct of a hypothetical reasonable attorney. U.S. Bank Nat'l Ass'n v. Sullivan-Moore, 406 F.3d 465, 470 (7th Cir. 2005); Ronco, 838 F.2d at 217; see, e.g., Senese v. Chicago Area I.B. of T. Pension Fund, 237 F.3d 819, 824 (7th Cir. 2001). An attorney's good faith belief that his statements were true or his omissions not misleading is insufficient. See Senese, 237 F.3d at 824 n.2. As our court of appeals has often observed, "an 'empty head but a pure heart is no defense.'" Sullivan-Moore 406 F.3d at 470 (quoting Chambers v. American Trans Air, Inc., 17 F.3d 998, 1006 (7th Cir. 1994)); Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir. 1986).

Footnote 10. Much of the case law under Rule 11(b)(3) addresses the reasonableness of the investigation the attorney undertook to determine whether his factual assertions had, or were likely to have, support. See, e.g., Samuels, 906 F.2d at 274; Ronco, 838 F.2d at 217 (stating that sanctions are justified when an attorney fails "to make an objectively reasonable investigation of the facts"). When the attorney has personal knowledge of the facts, however, and is alleged to have misrepresented or omitted them, the nature of any investigation is irrelevant. "To the extent that the presenter has personal, firsthand knowledge of salient facts, the Rule does not require that any pointless investigation be undertaken." Joseph, supra, § 7(A)(1) at 2-92; see also id., § 8(A)(5) at 2-108. The sole question is the reasonableness of the attorney's conduct in misstating or omitting the facts.

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