583 B.R. 155
Bankr. N.D. Ill.2018Background
- Debtor Elton Tabor faced imminent sheriff sale of his residence and retained the Schaller Law Firm after receiving solicitation mailings. Two Chapter 13 petitions were filed in 2015 (Tabor I and Tabor II); both were dismissed (Tabor I for failure to file a plan; Tabor II for unreasonable delay and ineligibility under §109(e)).
- Schaller is sole owner and manager of the firm; filings were submitted using associate Michael Oreluk’s CM/ECF account; Schaller supervised firm practices including standardized intake materials and prefilled Schedule B entries.
- The firm used a “Surrender Method”: solicitations promising delay/relief, filing Chapter 13 plans that did not provide for the mortgage(s) and often left loan modification to the debtor to pursue pro se, with side agreements disclaiming the firm’s assistance on modifications.
- The U.S. Trustee alleged six claims (as framed in the pretrial statement) attacking eligibility, advertising, plan good faith, prefabricated/inaccurate schedules, firm culture, and refusal to acknowledge misconduct; Claim 6 was later barred as beyond the Motion.
- The bankruptcy court tried the Motion under its §105(a) authority, found the factual predicates proven by a preponderance of the evidence (including that Tabor was ineligible, the Plan lacked good faith, and schedules were prepared using prefabricated answers without adequate attorney review), and ordered remedies including refund of fees, an additional $4,000 payment to the debtor, and payment of U.S. Trustee’s fees related to reopening the case.
Issues
| Issue | Plaintiff's Argument (U.S. Trustee) | Defendant's Argument (Schaller) | Held |
|---|---|---|---|
| 1. Was Tabor ineligible for Chapter 13 and did Schaller cause ineligible cases to be filed? | Tabor’s schedules show secured and unsecured debt exceeding §109(e) limits; Schaller filed/caused the filings to buy time. | Firm reasonably believed eligibility or relied on associates; filings were curable. | Held: Tabor was ineligible; Schaller caused the ineligible filings and cannot avoid responsibility by blaming associates. |
| 2. Is the “Surrender Method” and related advertising impermissible/misleading? | Method targeted vulnerable homeowners, created misleading expectations, and was used to obtain delay rather than bona fide relief. | Surrender is a permissible plan option; solicitations and side agreements were appropriate and clients were informed. | Held: Court declined a broad ruling that every Surrender Method is impermissible but found its implementation here misleading and improper; professional-discipline issues reserved for disciplinary forums. |
| 3. Was the Chapter 13 plan filed in bad faith / lacking good faith under §1325? | Plan omitted mortgage treatment, relied on rental income without protecting it, and was doomed to fail—filed to delay creditors. | Client consent and ability to pursue pro se modification meant plan was permissible; lack of debtor testimony precludes finding of bad faith. | Held: Plan was not proposed in good faith on the totality of circumstances; Schaller responsible. |
| 4. Were schedules inaccurate due to prefabricated answers and failure to personally review, violating rules and CARA? | Schaller used prefabricated Schedule B entries across many cases and failed to personally review or ensure accuracy, violating Rule 1008 and CARA. | Prefilled entries were guides; associates would correct if client-provided data differed; inquiry was reasonable. | Held: Evidence showed routine prefilling and inadequate attorney review; schedules violated Rule 1008 and CARA duties; Schaller accountable. |
Key Cases Cited
- Chambers v. NASCO, Inc., 501 U.S. 32 (U.S. 1991) (court’s inherent sanctioning powers and relationship to statutory schemes)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (U.S. 2007) (§105 and inherent powers may be used to enforce bankruptcy policies)
- Law v. Siegel, 571 U.S. 415 (U.S. 2014) (limits on bankruptcy court power and sanctioning abusive practices)
- In re Rimsat, Ltd., 212 F.3d 1039 (7th Cir. 2000) (use of §105 where other sanctioning tools are inadequate)
- In re Volpert, 110 F.3d 494 (7th Cir. 1997) (bankruptcy court’s authority to sanction under §105 and inherent powers)
- In re Rimgale, 669 F.2d 426 (7th Cir. 1982) (good-faith inquiry for Chapter 13 plans)
- Zale Del., Inc. v. Cox, 239 F.3d 910 (7th Cir. 2001) (discussion of compensatory vs punitive sanctions available to bankruptcy courts)
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (preponderance standard in civil bankruptcy contexts)