White v. Mitchell ( 1998 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In re: VIVIAN J. HARDEE,
Debtor.
BARBARA L. WHITE,
Plaintiff-Appellant, No. 96-1968
v.
RICHARD M. MITCHELL, Trustee for
Vivian J. Hardee,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of North Carolina, at Charlotte.
Robert D. Potter, Senior District Judge.
(CA-95-504-3-P, BK-95-31282)
Argued: April 10, 1998
Decided: October 20, 1998
Before MURNAGHAN, HAMILTON, and MICHAEL,
Circuit Judges.
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Reversed by unpublished per curiam opinion.
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COUNSEL
ARGUED: Barbara Leslie White, Charlotte, North Carolina, for
Appellant. Richard M. Mitchell, MITCHELL, RALLINGS, SINGER,
MCGIRT & TISSUE, P.L.L.C., Charlotte, North Carolina, for Appel-
lee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
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OPINION
PER CURIAM:
Barbara White appeals monetary sanctions imposed upon her under
Bankruptcy Rule 9011 for conduct arising from her representation of
Vivian Hardee in Hardee's personal bankruptcy case. The trustee for
the bankruptcy estate moved for sanctions after he suspected that
White had purposely misrepresented the nature of a pension asset in
a statement and schedules filed with the debtor's petition. The bank-
ruptcy court imposed sanctions on White in 1995 after determining
that she had violated Rule 9011, which relates to the signing of court
papers. The district court affirmed. Because the papers in question did
not have to be signed by an attorney, Rule 9011 (as it existed in 1995)
did not authorize sanctions. Moreover, we believe that White's con-
duct did not warrant a sanction under any other authority. We there-
fore reverse.
I.
This dispute centers around a single asset. In 1991 Hardee acquired
a beneficial interest in an ERISA-qualified pension plan following the
death of her cousin, James Swink. Swink had worked as a teacher on
Long Island and had named Hardee as the beneficiary of his pension
plan benefits in the event of his death. After Swink's death the plan
manager, Teachers Insurance and Annuity Association of America-
College Retirement Equities Fund (TIAA-CREF), gave Hardee the
option of taking a lump-sum payment from the plan or drawing an
annuity that would be paid monthly over approximately eighteen
years. Hardee chose the annuity.
2
Hardee filed a Chapter 7 bankruptcy petition on August 31, 1995.
The TIAA-CREF annuity was listed in four separate places on forms
filed with the petition. First, it was listed on Schedule B as personal
property. Second, it was shown on Schedule C as property claimed as
exempt, with the notation that the exemption was provided under
ERISA. Third, the monthly income from the annuity was listed on
Schedule I as "other monthly income." Finally, in the statement of
financial affairs, the income was listed as "income other than from
employment or operation of business."
A trustee was appointed for Hardee's bankruptcy estate on Septem-
ber 1, 1995. At a meeting of creditors held pursuant to 11 U.S.C.
§ 341(a) (1994), the trustee asked if there were any amendments to
Hardee's petition. Hardee answered that there were not. The trustee
then asked Hardee to explain the "Teachers and Insurance Annuities"
listed on the schedules. Hardee said that this was an annuity she had
inherited from her cousin. White, Hardee's attorney, added that she
may need to amend the schedules to reflect this information. The
trustee then abruptly closed the meeting, saying that he had already
asked for amendments and had been told there were none. The trustee
apparently believed that White had deliberately mischaracterized the
pension asset on the schedules.1
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1 Qualified pension benefits may be excluded from a bankruptcy estate,
thereby placing them beyond the reach of creditors. See Patterson v.
Shumate, 504 U.S. 753, 755 (1992). This result is brought about by
§ 541(c)(2) of the Bankruptcy Code, which excludes from the bank-
ruptcy estate any interest in a trust that is subject to transfer restrictions
under applicable non-bankruptcy law. Shumate, 504 U.S. at 758. This
necessarily excludes from the bankruptcy estate all interests in pension
plans that are qualified under the Employee Retirement Income Security
Act of 1974 (ERISA), which requires that all pension plans include a
prohibition on assignment and alienation. See 29 U.S.C. § 1056(d)(1)
(1994).
Here, the trustee claimed that by failing to indicate that the debtor
(Hardee) was a beneficiary of someone else's pension plan, White (the
debtor's attorney) had improperly created the impression that the pension
benefits could be excluded or exempted from the bankruptcy estate. In
fact, the bankruptcy court found that the pension should be excluded
from the estate, even though Hardee was only a beneficiary of the pen-
sion and not the original participant in the pension plan. See In re
Hardee, No. 95-31282 at 3-4 (Bankr. W.D.N.C. Nov. 22, 1995) (order
sustaining objection to exemption).
3
The trustee subsequently moved for sanctions against White. The
bankruptcy court granted the motion and ordered White to forfeit her
fees in the case, pay attorney's fees of $500 to the trustee, and pay
a penalty of $2,500 into court. White appealed to the district court,
which affirmed. She has taken a further appeal to us.
II.
The sanctions here were imposed under Bankruptcy Rule 9011. In
reviewing an award of sanctions under Rule 9011, we may follow the
standards applicable under Federal Rule of Civil Procedure 11, a cor-
responding sanctions provision. In re Weiss, 111 F.3d 1159, 1170 (4th
Cir. 1997). We review an award of sanctions under Rule 11 using an
abuse of discretion standard. Cooter & Gell v. Hartmarx Corp., 496
U.S. 384, 405 (1990). A court abuses its discretion if it bases its order
for sanctions on "an erroneous view of the law or on a clearly errone-
ous assessment of the evidence." Id. We adopt the same standard of
review for sanctions imposed under Bankruptcy Rule 9011. See In re
Weiss, 111 F.3d at 1170.
III.
The sanctions against White were imposed in 1995. Our first ques-
tion, then, is whether Bankruptcy Rule 9011, as it existed prior to its
amendment in 1997, authorized sanctions against an attorney for
defects in bankruptcy schedules and statements. 2
Before the 1997 amendment Rule 9011(a) stated:
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2 Rule 9011 was amended in 1997 to conform to the 1993 changes to
Federal Rule of Civil Procedure 11. See Fed. R. Bankr. P. 9011 advisory
committee's notes. This amendment broadened the scope of attorneys'
obligations to the court, but placed additional constraints on the imposi-
tion of sanctions. See Fed. R. Civ. P. 11 advisory committee's notes. The
amendment to Rule 9011 also gave courts discretion to impose sanctions;
previously, sanctions for violations were mandatory. See Fed. R. Bankr.
P. 9011 advisory committee's notes.
Our discussion as to the scope of Rule 9011 is limited to the rule as
it existed prior to the 1997 amendment.
4
(a) Signature
Every petition, pleading, motion and other paper served
or filed in a case under the Code on behalf of a party repre-
sented by an attorney, except a list, schedule, or statement,
or amendments thereto, shall be signed by at least one attor-
ney of record in the attorney's individual name, whose
office address and telephone number shall be stated. A party
who is not represented by an attorney shall sign all papers
and state the party's address and telephone number. The sig-
nature of an attorney or a party constitutes a certificate that
the attorney or party has read the document; that to the best
of the attorney's or party's knowledge, information, and
belief formed after reasonable inquiry it is well grounded in
fact and is warranted by existing law or a good faith argu-
ment for the extension, modification, or reversal of existing
law; and that it is not interposed for any improper purpose,
such as to harass or to cause unnecessary delay or needless
increase in the cost of litigation or administration of the
case. If a document is not signed, it shall be stricken unless
it is signed promptly after the omission is called to the atten-
tion of the person whose signature is required. If a document
is signed in violation of this rule, the court on motion or on
its own initiative, shall impose on the person who signed it,
the represented party, or both, an appropriate sanction,
which may include an order to pay to the other party or par-
ties the amount of the reasonable expenses incurred because
of the filing of the document, including a reasonable attor-
ney's fee.
This rule, like Rule 11 of the Federal Rules of Civil Procedure, is
aimed at curbing abuses of the judicial system. Both Rule 11 and
Bankruptcy Rule 9011 operate by way of a certification requirement.
However, the certification scheme of Rule 9011 does not extend to
bankruptcy schedules and statements. Attorneys need not sign (and
thereby certify) every document in a bankruptcy case. The provision
of Rule 9011(a) that actually authorizes sanctions begins "[i]f a
document is signed in violation of this rule . .. ." (emphasis added).
The Advisory Committee's Notes define "document" as "all papers
5
which the attorney or party is required to sign."3 Fed. R. Bankr. P.
9011, advisory committee's notes. However, Rule 9011(a) exempts "a
list, schedule, or statement, or amendments thereto" from the signa-
ture requirement. Since the schedules and statements need not be
signed by an attorney, they are not "documents" for the purposes of
Rule 9011 and therefore cannot trigger the imposition of sanctions
under the rule. See In re Palumbo Family Ltd. Partnership, 182 B.R.
447, 475-76 (Bankr. E.D. Va. 1995); In re Eatman , 182 B.R. 386, 396
(Bankr. S.D.N.Y. 1995); In re Remington Dev. Group, 168 B.R. 11,
15 (Bankr. D.R.I. 1994); In re Ostas, 158 B.R. 312, 319 (Bankr.
N.D.N.Y. 1993); In re Alderson, 114 B.R. 672, 677 (Bankr. D.S.D.
1990); but see In re Weiss, 111 F.3d at 1170. In sum, the plain mean-
ing of Rule 9011 does not allow the imposition of sanctions on White
for defects in the schedules and statement at issue in this case. The
district court therefore erred in affirming the sanctions.4
IV.
Although Rule 9011, as it existed in 1995, did not authorize sanc-
tions against an attorney for defects in bankruptcy schedules and
statements, we recognize that bankruptcy courts have other avenues
for sanctioning improper conduct by parties and attorneys. For exam-
ple, bankruptcy courts may punish criminal contempt, Fed. R. Bankr.
P. 9020, and civil contempt, see In re Walters , 868 F.2d 665, 670 (4th
Cir. 1989). They may impose sanctions for abuses in the discovery
process. See Fed. R. Bankr. P. 7037 (incorporating Fed. R. Civ. P. 37
into Bankruptcy Rules). Bankruptcy courts also possess the inherent
power to regulate litigants' behavior and to sanction wrongdoing by
litigants. See In re Weiss, 111 F.3d at 1171; A.H. Robins Co. v.
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3 Ordinarily, pleadings and papers must be signed by an attorney. See
Fed. R. Bankr. P. 9011(a). If a party is not represented by counsel, that
party must sign the documents in place of an attorney. See id.
4 We note that some bankruptcy courts have narrowed the exemption
in Rule 9011 to the "lists," "schedules," and "statements" required to be
filed under Federal Rule of Bankruptcy Procedure 1007. See, e.g., In re
Palumbo Family Ltd. Partnership, 182 B.R. at 475-76; In re Ostas, 158
B.R. at 319. This case fits within this narrow exemption, since the sched-
ules and statement here were filed under Bankruptcy Rule 1007. See Fed.
R. Bankr. P. 1007(b).
6
Piccinin, 788 F.2d 994, 1003 (4th Cir. 1986). This inherent power
may be used in combination with, or instead of, the bankruptcy
courts' other powers to sanction. See In re Weiss, 111 F.3d at 1171.
In different circumstances, we might have remanded for the consid-
eration of sanctions under authority other than pre-amendment Rule
9011. Here, however, we have all of the facts before us, and we con-
clude that White should not be sanctioned under any available
ground. We say this because the schedules and statement in this case
were well grounded in fact and were not filed for any improper pur-
pose. Our explanation follows.
A.
The first consideration is whether the schedules and statement of
financial affairs were well grounded in fact. This is measured by an
objective standard of reasonableness under the circumstances. See
Business Guides, Inc. v. Chromatic Comm. Enter., 498 U.S. 533, 551
(1991); In re Kunstler, 914 F.2d 505, 514 (4th Cir. 1990). This stan-
dard was met.
White listed the interest in the pension annuity on the correct line
on Schedule B. She also referred to the annuity in three other places
-- on Schedule C, claiming the asset as exempt; on Schedule I, listing
Hardee's current income from the annuity; and on the statement of
financial affairs, listing Hardee's income from the annuity. The trust-
ee's own expert conceded that White had listed this interest in the cor-
rect place on Schedule B, stating only that White should have added
a note clarifying the nature of the interest. Unartful disclosure, how-
ever, such as a conclusory listing, is "irrelevant" to the factual inquiry
under Rule 9011. See Brubaker v. City of Richmond, 943 F.2d 1363,
1373 (4th Cir. 1991); Simpson v. Welch, 900 F.2d 33, 36 (4th Cir.
1990). Furthermore, sanctions are inappropriate for"isolated factual
errors, committed in good faith, so long as [the document] as a whole
remains `well grounded in fact.'" Forrest Creek Assocs. v. McLean
Savings & Loan Assn., 831 F.2d 1238, 1245 (4th Cir. 1987).
The level of disclosure here was reasonable in light of the nature
and purpose of the bankruptcy schedules and forms. The 1991 Advi-
sory Committee Notes to the Form 6 Schedules (Schedules A-J)
7
explain that "[t]he schedules require a complete listing of assets and
liabilities but leave many of the details to investigation by the
trustee." 11 U.S.C.A. Official Bankr. Form 6, advisory committee's
notes (West pamph. 1998) (emphasis added). Indeed, the schedules
were intended to be summaries that could serve as a quick and easy
list of relevant information. The Notes state that Schedule C, for
example, was simplified in 1991 by "eliminat[ing the] duplication of
information provided" on other schedules. See id. Similarly, a former
requirement in Schedule C that the debtor state the present use of
property was "eliminated as best left to inquiry by the trustee." See
id. The requirements for listing personal property in Schedule B also
reflect the basic purpose of the schedules. The Notes state that this
schedule requires that debtors declare whether they have "any prop-
erty in each category on the schedule." Id. They add that the trustee
"can request copies of any documents concerning the debtor's prop-
erty necessary to the administration of the estate." Id. The Advisory
Committee Notes elaborate that "Section 521(3) of the Code requires
the debtor to cooperate with the trustee, who can administer the estate
more effectively by requesting any documents from the debtor rather
than relying on descriptions in the schedules which may prove to be
inaccurate." (emphasis added).
Of course, false and deceptive schedules and statements will not be
tolerated and are subject to sanctions. However, there was no false-
hood or deception here. White's disclosure of the pension on the
schedules and statement was accurate, and the trustee could have
investigated further. We recognize that bankruptcy trustees are under
pressure to perform their duties in an expeditious fashion. Still, the
trustee here was made aware of the pension asset, and he could have
taken a couple of minutes to inquire into the source of the asset rather
than close the creditors' meeting and move for sanctions.
We conclude that the schedules and statement were well grounded
in fact.
B.
The second consideration is whether the schedules and statement
of affairs were filed for an improper purpose. The attorney's conduct
8
must be evaluated according to an objective standard of reasonable-
ness. See In re Weiss, 111 F.3d at 1171.
There is ample objective evidence that White did not have an
improper purpose in filing the schedules and statement. She disclosed
the pension asset in four separate places in the papers. The trustee's
witnesses said that the substance of this disclosure would have led
them to assume that the debtor was a teacher or retired teacher. How-
ever, it was disclosed on Schedule I that Hardee (the debtor) was
working as a secretary. This suggests that there was no intent to mis-
lead the trustee as to the nature of Hardee's interest in the pension.
The listing of the pension interest as exempt property under ERISA
does not appear to have been made for an improper purpose but rather
seems to have been made as part of a good faith argument under the
Supreme Court's decision in Patterson v. Shumate , 504 U.S. 753(1992). In that case the Court held that the non-alienation provisions
of ERISA would exclude qualified pension benefits from the bank-
ruptcy estate under 11 U.S.C. § 541(c)(2) (1994). Indeed, the bank-
ruptcy court in this case relied on Patterson v. Shumate to hold that
Hardee's pension interest was not property of the bankruptcy estate.
In re Hardee, No. 95-31282 at 3-4 (Bankr. W.D.N.C. Nov. 22, 1995)
(order sustaining objection to exemption). Of course, White's disclo-
sure of the pension as exempt was not strictly accurate under
Patterson v. Shumate because it was excluded entirely from the bank-
ruptcy estate. However, the disclosure of the asset as exempt had two
significant advantages. It openly disclosed the existence of the asset
to the trustee, avoiding the danger of a subsequent charge that it was
improperly omitted in the event it was ultimately determined to be a
part of the estate. Disclosure in this manner also gave White an alter-
native argument, that is, the pension was not property of the estate,
but even if it was, it was exempt property.
We conclude that the schedules and statement were not filed for an
improper purpose.
V.
Bankruptcy Rule 9011, as it appeared on the books prior to the
1997 amendment, did not provide a basis for sanctioning White in this
9
case. In addition, we conclude that White's conduct did not warrant
sanctions under any other authority. The judgment of the district court
is therefore reversed.
REVERSED
10