Bankruptcy Law Roundup

Sharp Thinking

No. 140     Perspectives on Developments in the Law from Sharp-Hundley, P.C.   January 2017

In Growing Trend, Illinois Court Imposes Sanctions

For Filing Bankruptcy Papers Without Actual Signature

By Michael L. Olson, Michael@sharp-hundley.com, 618-242-0200

No circumstances ever justify an attorney filing a bankruptcy petition, including its related schedules and statement of financial affairs, “without first obtaining a debtor’s actual signature on the documents,” a bankruptcy judge from the Central District of Illinois recently held.

Emphasizing the seriousness of this misconduct, Judge Mary P. Gorman held that such actions constitute a violation of “the Bankruptcy Code, the Bankruptcy Rules, the Judicial Code (Title 28), the Local Rules, and this Court’s Standing Order.”  In re Reubling, 2016 WL 6877796 (Bankr. C.D. Ill. 2016).

In addition to filing the bankruptcy petition without first obtaining his clients’ signatures, the sanctioned attorney also admitted to filing a first and second amended plan that were never signed by the debtors, and to filing an amended bankruptcy schedule before it was signed by his clients.                                           

The sanctioned attorney claimed that he was preoccupied with family health issues and was out of the office for significant periods of time. As a result, he had authorized his paralegal to file the petition based on the assumption that his clients had already signed the necessary paperwork.

The judge did not react well to the attorney’s defense, asserting that the attorney “has a duty to know what is going on in his office and his self-imposed ignorance is no defense.  To the contrary, it is an aggravating factor.”

To make matters worse, the court sampled five previous cases from the same attorney and found that he had committed another violation when he filed a bankruptcy petition over two months after it had actually been signed by the client. 

In addition to denying his application for compensation, the judge entered sanctions against the attorney requiring him to personally witness his clients sign each document before it is filed for a period of one year.  Then for an additional year thereafter, the attorney is required to personally inspect his client’s “wet signature” on each document before it is filed.  To ensure compliance with these sanctions, the attorney is required to file an affidavit identifying each document filed and the date the document was signed.

Although the court recognized these sanctions may be viewed as burdensome, it recognized that they were necessary in order to “impress upon [the attorney] the seriousness of his misconduct.”

This decision marks a growing trend from bankruptcy courts in at least three other states regarding the strict enforcement of Bankruptcy Rule 9011’s signature and verification requirements.  The holding in Reubling relied in part on a decision from a Texas bankruptcy court, where the attorney was also sanctioned for filing bankruptcy papers without a wet signature.  See In re Stomberg, 487 B.R. 775 (Bankr. S.D. Tex. 2013).  This decision and its potential consequences were discussed in a previous edition of Sharp Thinking.  See Sharp Thinking No. 86 (Mar. 2013). 

As noted in that issue, the decision in Stomberg does not constitute binding precedent.  However, the continued reliance on that decision by other bankruptcy courts, now including Illinois, should serve as a stern warning that signature and verification requirements for bankruptcy filings should not be overlooked.

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No Rescission for Confirmed Bankruptcy Plan

            A confirmed bankruptcy plan “operates as an absolute settlement” and “failure to pay unpaid obligations created by the plan will not revive the old debts,” a panel of the Appellate Court’s Fifth District held recently.

            Acting in Holman v. Village of Alorton, 2016 IL App (5th) 150404, the court said there was nothing in the Bankruptcy Code to suggest that the debtor’s failure to achieve promises made in a confirmed plan reinstates an original obligation.  The panel also said there was no authority permitting state courts to “rescind” a “contract” made in a bankruptcy reorganization plan.  Rather, it said, the bankruptcy plan “is solely under the jurisdiction of the federal courts.”

            In Holmon, defendant village’s policeman shot a citizen, who recovered a judgment for $978,874.  Defendant then filed for protection under Chapter 9 of the Bankruptcy Code, and the injured citizen agreed to a plan under which the village would pay him $600,000 over 25 years.  Subsequently, an amended plan was confirmed, awarding the majority of the citizen’s payments to one Goodlow, who had recovered a $346,000 judgment against the citizen.

            By February 2015, the village should have paid him $95,000 but had only paid some $20,000.  The citizen filed suit for breach of contract and rescission, but the appellate court said “enforcement of the terms of the ‘contract’ and not rescission is the appropriate remedy.”

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