The Bankruptcy Appellate Panel for the Ninth Circuit (9th Circuit BAP) issued its decision in In re Blue Pine Group, — B.R. –, 2011 WL 4482127 (B.A.P. 9th Circuit 2011). This decision affirmed the bankruptcy court’s decision imposing sanctions on Debtor’s counsel, David J. Winterton and Associates, in the amount of $109,528 for an improper corporate chapter 7 filing.
This case presents a very simple rule for attorneys: know your debtor. The Debtor’s lawyer filed a bankruptcy without an attached corporate authorization statement, and apparently, without having reviewed the Debtor’s articles of incorporation. Like many business bankruptcies, it’s never as simple as the business is just insolvent. This case involved a corporation, Blue Pine, created to operate a gasket business. It was a joint venture between Humitech, a California corporation, and John Grose. A dispute promptly arose between Grose and Humitech, which in turn, devolved into a lawsuit in California state court.
Grose decided to put Blue Pine into bankruptcy, probably trying to gain leverage in the state court litigation, and hired David J. Winterton and Associates. Grose, by signing as the person authorized to act on behalf of Blue Pine, represented that he had the authority to put Blue Pine into bankruptcy and made various other representations about Blue Pine’s corporate structure. These representations proved to be untrue, most significantly Grose did not have the authority to put Blue Pine into bankruptcy.
Humitech’s attorney sent a letter to Blue Point’s attorney threatening sanctions for an improper filing and requesting that the bankruptcy be dismissed. Humitech’s attorney also attached a true and correct copy of Blue Pine’s articles of incorporation. Blue Point’s attorney doubled down and refused. Humitech filed a motion to dismiss the case. The bankruptcy court dismissed the case on the grounds that the filing was not authorized by the board of directors; and that, Grose had not followed the procedures in the articles of incorporation for actions outside the ordinary course of business. In its order of dismissal, the bankruptcy court retained jurisdiction to hear any sanctions motions.
Humitech filed a motion for sanctions under Bankruptcy Rule 9011 (Rule 11 for you non-bankruptcy readers), alleging that the case was improperly filed, and that Blue Pine’s bankruptcy lawyer had not conducted an adequate pre-filing investigation. Perhaps most importantly, Blue Pine’s lawyer passed on an offer to voluntarily dismiss the case. If he had dismissed the case then, he probably could have avoided sanctions on the grounds that he was mislead by Grose and he took corrective action as soon as he discovered the truth.
Once Winterton passed on the opportunity to dismiss voluntarily dismiss, and indeed continued to argue that Grose had authority, Humitech’s argument for sanctions would only get more traction with the bankruptcy court. In fact, continuing to argue that Grose had authority, even after seeing the articles of incorporation, became circumstantial evidence that the bankruptcy attorney didn’t care about the truth. It is one thing to be mislead by a client, it is another thing to willfully ignore the truth and to continue to hold a factually and legally untenable position.
I’ve done emergency filings for businesses before; and, I relied on the business’ representative to give me accurate information. You basically cross your fingers and hope you’re getting the truth. But, I’ve always had a signed corporate resolution form the representatives in my office and declarations subscribed under 28 U.S.C. 1746 that they were authorized to act on behalf of the debtor corporation; and that, under the articles of incorporation they had taken all steps necessary to act outside the ordinary course of business. Then I give them a letter – which is also emailed out – describing exactly what I need, when I need it, and that I cannot proceed without those items.
Regardless of what you think about his politics, President Reagan had a great saying “trust, but verify.” I’ll trust my clients, but I’ll verify everything they say as best I can under the circumstances. If under the circumstances means you have to trust them and file the petition, fine; but, follow-up the next day and verify. If its something where only the client knows, at least get a declaration. If the client has given you bad information, don’t double down on it, fix it: dismiss the case, send a letter of correction, withdraw, or do whatever is appropriate given the situation.