An attorney who fails to reasonably inquire into the facts being presented to him by a bankruptcy client risks incurring sanctions for not doing so. In In re Kayne (Orton v. Hoffman) 453 B.R. 372 (9th Cir. BAP 2011), an attorney’s failure to properly investigate and accurately state the facts in a client’s Chapter 7 petition cost him more than $20,000 in sanctions. That figure was the amount of attorney’s fees incurred by the Chapter 7 trustee to investigate and pursue the matter.
The issue concerned payments which the client was receiving under the terms of a settlement reached in a state court case. At the time of the bankruptcy filing, the client was holding a note from a confidential settlement with a balance of more than $60,000. The client had been receiving regular monthly payments of $1,250 on the note.
The attorney told the client that it would not be necessary to disclose the particulars of the note or payments on it in the petition. Rather, disclosing the existence of the state court lawsuit in the statement of financial affairs would be sufficient. The attorney told the client that it would be the duty of the Chapter 7 trustee to pursue the matter and investigate whether there was a settlement agreement. At the meeting of creditors, the debtor testified that the remaining balance on the note was about $7,000. The attorney was present and said nothing.
After the Chapter 7 case was closed, the attorney for the judgment debtor contacted the Chapter 7 trustee and informed him that his client was making payments on the note with a $60,000 balance. The trustee reopened the case and deposed the Chapter 7 debtor, who told the trustee about her lawyer’s advice.
When the trustee finished pursuing the matter, he petitioned the court for an award of $20,000 in sanctions against the attorney. That amount was the amount of attorney’s fees which the trustee incurred dealing with the issue. The court agreed with the trustee and awarded the sanctions against the attorney.
From the client’s perspective, this case illustrates the reason why a bankruptcy lawyer requires the client to fully disclose all of the facts relevant to the client’s financial situation. The lawyer may well need to ask the client uncomfortable questions in order to fully understand the client’s situation. The client certainly should not shade the truth with the lawyer. The goal should be that of filing a petition which accurately and completely discloses all relevant information concerning the client’s financial situation. Better to emerge from a closed bankruptcy case having fully disclosed everything than to have to worry about having the case reopened and pursued.
Further, if the failure to disclose is egregious enough, the client risks the chance that the Chapter 7 trustee may even refer the matter to the U.S. Attorney to consider whether to bring a criminal case against the debtor for bankruptcy fraud.