570 B.R. 128
Bankr. E.D.N.Y.2017Background
- Debtor filed a Chapter 7 petition on Sept. 30, 2014; counsel Shawn R. Kassman signed the petition and attendant schedules and Form 22A. Schedule I listed gross and net income and payroll deductions; Schedule J showed a net monthly deficit.
- Trustee moved under 11 U.S.C. §§ 707(b)(1), (3) and (4) to dismiss for abuse (totality of circumstances) and to recover fees/costs under § 707(b)(4)(A); debtor did not oppose dismissal and the case was dismissed at hearing.
- Trustee alleged debtor actually had substantial disposable income ($1,636.21/month) based on: voluntary retirement contributions and retirement-loan repayments, undocumented payments for her adult son’s college expenses, and $772.51/month contributions from her husband/fiancé. Trustee produced paystubs, bank statements, canceled checks, and a post-petition affidavit from debtor.
- Kassman opposed the fee request, claiming debtor was uncooperative and that he had requested but did not receive documentation; he argued certain payments were from a joint account funded by debtor’s mother and thus properly excluded. He sought $3,500 reimbursement for his own response work.
- The Court found Kassman failed to conduct a reasonable pre‑filing investigation (Bankr. R. 9011 and 11 U.S.C. §§ 707(b)(4)(C),(D)): incomplete Means Test, failure to verify bank statements and sources of deposits, failure to investigate retirement contribution/loan status, student payments, and contributions from debtor’s fiancé/husband.
- Because the Court found a Rule 9011/§ 707(b)(4) violation, it granted the Trustee’s request in principle and ordered submission of an itemized statement of fees and costs for adjudication and a hearing.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Kassman) | Held |
|---|---|---|---|
| Whether debtor’s counsel conducted a reasonable pre‑filing inquiry under Rule 9011 and §§ 707(b)(4)(C),(D) | Counsel failed to verify bank/paystub evidence showing voluntary retirement contributions, retirement‑loan repayments, son’s tuition payments, and spouse contributions; thus he did not make a reasonable inquiry | Counsel says debtor was uncooperative and did not provide requested documentation; any errors resulted from debtor, not counsel | Held counsel failed to perform a reasonable investigation; reliance on client and post‑petition inquiries insufficient |
| Whether retirement contributions and retirement‑loan repayments were properly characterized as mandatory and thus excluded from disposable income | Trustee: contributions and loan repayments appear voluntary and should have been investigated and likely included in disposable income | Counsel: requested details from debtor but received no response; thus used debtor’s representations | Held characterization without verification was unreasonable; counsel violated duty to investigate |
| Whether payments for debtor’s adult son’s college expenses should have been included in expense calculations | Trustee: bank records show regular payments for son’s tuition that should affect means analysis | Counsel: payments came from a joint account funded by debtor’s mother and thus were properly excluded | Held counsel should have reviewed bank records and inquired; exclusion without verification was unreasonable |
| Whether non‑debtor contributions (fiancé/husband) should have been included in income | Trustee: records and post‑petition affidavit show $772.51/month from Sevilla that should be counted as household income | Counsel: asserts he was not informed of engagement or third‑party contributions | Held counsel should have discovered or inquired about fiancé (engagement ring listed, joint account deposits); failure to verify was unreasonable |
Key Cases Cited
- Desiderio v. Parikh (In re Parikh), 508 B.R. 572 (E.D.N.Y. 2014) (discussing interplay of § 707(b)(4) and Rule 9011 and reasonable‑investigation standard)
- Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990) (standard for imposing Rule 11 sanctions and inquiry reasonableness)
- Orton v. Hoffman (In re Kayne), 453 B.R. 372 (9th Cir. BAP 2011) (reasonable investigation obligation under § 707(b)(4))
- Lafayette v. Collins (In re Withrow), 405 B.R. 505 (1st Cir. BAP 2009) (objective‑reasonableness standard for attorney inquiry)
- In re Blankenship, 398 B.R. 457 (Bankr. N.D. Ohio) (treatment of voluntary retirement contributions in means analysis)
- In re Mowris, 384 B.R. 235 (Bankr. W.D. Mo.) (repayments of loans against retirement accounts are not deductible necessary expenses)
- In re Lanza, 450 B.R. 81 (Bankr. M.D. Pa.) (tuition for persons debtor has no duty to support treated as discretionary)
- Matter of Strong, 84 B.R. 541 (Bankr. N.D. Ind.) (non‑petitioning spouse income impacts debtor’s financial situation)