Christine M Sugar
Decided: March 5, 2025
Amended: March 12, 2025
Affirmed in part, vacated in part, and remanded by published opinion. Judge Agee wrote the opinion in which Chief Judge Diaz and Judge Niemeyer join.
ARGUED: Travis P. Sasser, SASSER LAW FIRM, Cary, North Carolina, for Appellant. Michael Brandon Burnett, OFFICE OF THE CHAPTER 13 TRUSTEE, Raleigh, North Carolina, for Appellees. ON BRIEF: Brian C. Behr, Kirstin E. Gardner, OFFICE OF THE BANKRUPTCY ADMINISTRATOR, Raleigh, North Carolina, for Appellees.
Christine Sugar appeals from the district court‘s orders affirming the bankruptcy court‘s finding that Sugar‘s sale of her residence, without prior court authorization, violated her confirmed Chapter 13 bankruptcy plan (the “Plan“). Along with challenging the bankruptcy court‘s underlying finding of a violation, Sugar asserts it erred in finding that the violation warranted dismissing her Chapter 13 case and prohibiting her from filing another bankruptcy application for five years. In addition, Travis P. Sasser, Sugar‘s attorney, separately appeals the district court‘s affirmance of the bankruptcy court‘s decision to impose monetary sanctions agаinst him personally.
For the reasons set out below, we conclude that the court did not err in holding that the sale violated the Plan and affirm its decision to impose monetary sanctions against Sasser. But we vacate and remand the judgment against Sugar so that the bankruptcy court can consider the effect of record evidence that she acted on advice of counsel as part of its decision about the appropriate remedy for Sugar‘s conduct and to explain why it determined that a remedy short of dismissal would fail to adequately redress what happened. Given the particular harshness of dismissal that was then augmented by the sanction of a five-year filing bar, an explanation accounting for the totality of the circumstances is required before any consequence can be imposed as to Sugar.
I.
In September 2019, Sugar filed for Chapter 13 bankruptcy in the Eastern District of North Carolina (“EDNC“). Under Chapter 13, debtors “with regular income” may obtain
Sugar‘s residence at the time she filed for bankruptcy is a focal point of the appeal. In her bankruptcy petition, Sugar listed as an asset her condominium residence with a value of $150,000 and subject to several liens. She represented her equity interest in the residence to be $32,348.81 and claimed that same amount as a homestead exemption under North Carolina law. That homestead exemption permits a debtor such as Sugar (i.e., under age sixty-five) to claim as exempt property their “aggregate interest, not to exceed thirty-five thousand dollars ($35,000) in value, in real property or other personal property that the debtor . . . uses as a residence.”
During the pendency of Sugar‘s bankruptcy proceedings (where she was represented by Sasser), she was subject to the EDNC bankruptcy court‘s local rules, orders entered in her case, and—after its confirmation—the Plan. As a consequence, both directly (the relevant local rule itself) or indirectly (via orders and the Plan referring to Sugar being subject to its terms), Sugar was instructed that she “must not dispose of any non-exempt property having a fair market value of more than $10,000.00 by salе or otherwise without
In November 2019, the bankruptcy court approved the Plan, which set Sugar‘s “applicable commitment period” at 36 months and further obliged her to make 60 monthly payments of $203 to the Trustee, for a total projected payment of $12,180.3 Among its other terms, the Plan stated that property vested upon confirmation of the Plan and that such vested property was to “remain in the possession and control of the Debtor[]” but “subject to the requirements of . . . § 363[] [and] all other provisions of the Bankruptcy Code, Bankruptcy Rules, and Local Rules.” J.A. 149. The Plan also “permitted [Sugar] to receive all net proceeds from the sale of vested property and/or exempt property that is sold during the pendency of the case,” but that this “provision [did] not prejudice and/or impact the rights of the parties pursuant to
Sugar made her required monthly payments, but on June 9, 2022, the Bankruptcy Administrator requested a status conference based on his belief that Sugar had contracted
That same day (June 10), Sugar moved for court approval to sell her residence. Attached to the motion was an executed contract for the sale of the condominium dated April 12, 2022, which listed the sale price as $222,000.
Before the status conference took place, however, Sugar closed on the sale without having obtained a court order. Sasser then withdrew the pending motion for court approval of the sale.
At the status conference, Sasser acknowledged that Sugar had already sold her residence and expressed his position that she had not needed prior court permission to do so. Sasser represented that he had only filed the motion for court approval out of an abundance of caution and had withdrawn it once the sale closed.
As a result, the bankruptcy court issued an order to appear and show cause “why this case should not be dismissed for failure to comply with” the Local Rule. J.A. 300. In tandem with the court‘s directive and relying on Sugar‘s failure to comply with the Local Rule and the Plan as well as Sugar‘s сhanged financial condition resulting from the sale of her residence, the Chapter 13 Trustee moved, in the alternative, to modify Sugar‘s Plan, convert the case to a Chapter 7 proceeding, or dismiss her bankruptcy proceeding.
In the interim, i.e., between the status conference and issuance of the show cause order and filing of the Trustee‘s motion, Sugar used some of the proceeds from the sale of her residence to pay the remaining balance due under the Plan. Specifically, she tendered $5,481 to the Trustee to pay in full the remaining 27 months’ worth of Plan payments.
The bankruptcy court considered the show cause order and the Trustee‘s motion during the same hearing because each responded to the same underlying conduct: Sugar‘s sale of her residence without having obtained a prior court order and the proceeds that she received as a result of the sale.4 When questioned about why she closed on the sale of her residence without first obtaining the court‘s permission, Sugar repeatedly and consistently testified that Sasser had informed her that her residence was exempt in full and that she did not need court approval before selling it. E.g., J.A. 482 (“I asked my bankruptcy attorneys. And . . . I was under the understanding that my house was exempt from the bankruptcy. So, I didn‘t believe that I needed permission to do anything with it because it was not part of the bankruptcy.“); J.A. 503-04 (testifying that her “bankruptcy attorney” “confirmed that the house was exempt“); J.A. 507 (“I have understood myself that the house was exempt based on documents that I saw and what I was told by my attorney.“); J.A. 509 (“I asked [Sasser] if there would be any issues or if there were any issues and I was told that the house was exempt so I had the right to sell my house and I could move forward.“). She also stated that she was not familiar with the bankruptcy court‘s local rules and that she did not intend to violate any rules. In addition, she explained that she agreed to Sasser filing the later-withdrawn motion for a court order regarding the sale.
Although Sasser had informed her that “the property was exempt and that I could go ahead and proceed with the sale of the home,” “at some point in the future he suggested
Following Sugar‘s testimony, the Trustee and Sasser presented arguments about what had occurred and how the bankruptcy court should proceed. For his part, Sasser offered several arguments for why the court could not—and should not—do anything. We need not cover all of them, but discuss some that reappear in this appeal. For example, Sasser argued that the court could not enter any additional orders in Sugar‘s bankruptcy case save for discharge under
The bankruptcy court rejected each of Sasser‘s arguments and found that dismissal was appropriate because Sugar had intentionally endeavored to skirt her obligations under the Plan and the Local Rule so that she could “skate away with $93,000 and not pay a cent to her creditors.” J.A. 564. Its subsequent written order disposed of Sugar‘s various
The bankruptcy court further deemed it appropriate to bar Sugar from filing for bankruptcy for a period of five years. It first noted that “cause” for this bar existed under
During that sanctions hearing, the Bankruptcy Administrator expressed his view that dismissal with a five-year refiling bar was a sufficient sanction against Sugar, but that monetary sanctions were also appropriate against Sasser. The bankruptcy court ultimately agreed with that recommendation, concluding that Sugar‘s conduct was adequately addressed by its earlier order, but that Sasser‘s conduct warranted sanctions “to enforce the Local Rule and ensure future compliance, not only by Mr. Sasser but all members of the bar.” J.A. 749.
At the hearing, Sasser had testified and argued in opposition to any sanction, contending that he had correctly advised Sugar in her proceeding and that Sugar did not violate the Local Rule when she sold her property without first obtaining the court‘s permission. Sasser maintained that he had nothing to apologize for because he‘d advised his client correctly based on his reasonable belief that her property was exempt. The bankruptcy court expressed reservations about Sasser‘s arguments not only because it had previously ruled against him on the merits of those arguments when it determined that Sugar‘s conduct violated the Local Rule and dismissed her Chapter 13 proceedings, but
The court determined that “Mr. Sasser, on the other hand, is a different matter,” and that monetary sanctions were appropriate against him. J.A. 717. The court оbserved that Sasser put his client “in a worse position just because of a rule or rules that her lawyer, Mr.
The court then found, to the extent the Supreme Court‘s standard for civil sanctions orders announced in Taggart applied, there was “no fair ground of doubt whether the Local Rule applied to the sale of the Property.” J.A. 751 (citing Taggart, 587 U.S. at 557). It observed that any doubt as to the applicability of the Local Rule to property subject to North Carolina‘s Homestead Exemption was settled by a prior order issued by the same judge in an earlier bankruptcy proceeding in which Sasser had served as counsel. It also pointed to Sasser having notice of the Bankruptcy Administrator‘s concerns about proceeding with the sale without a court order, as reflected when it moved for a status conference. The court concluded that Sasser‘s advice to proceed with the sale notwithstanding this knowledge showed a “lack of deference to the Local Rule and orders of this court,” which “harmed the integrity of this court and the bankruptcy system as a whole,” thus warranting sanctions under
Sugar and Sasser appealed the bankruptcy court‘s orders to the district court, which affirmed, agreeing with each of the bankruptcy court‘s findings and the relief ordered. Sugar v. Burnett, No. 5:23-cv-082-FL, 2024 WL 1336671 (E.D.N.C. Mar. 28, 2024); Sasser v. Burnett, No. 5:23-cv-411-FL, 2024 WL 1750552 (E.D.N.C. Apr. 23, 2024).
Thereafter, Sugar and Sasser noted timely appeals, which the Court consolidated for briefing and argument. We have jurisdiction under
II.
On appeal, Sugar—who is still represented by Sasser—and Sasser, on his own behalf; raise multiple arguments seeking to have the orders entered against them reversed or modified. In conducting our review, we‘ve grouped the arguments into the following general categories: first, we consider the challenge to the bankruptcy court‘s determination that Sugar violated the Local Rule when she sold her residence without a court order. Second, we consider whether the bankruptcy court abused its discretion in ruling that this violation was intentional and thus warranted dismissal of Sugar‘s bankruptcy proceedings
A.
We turn first to the arguments urging us to reverse the lower courts’ determinations that Sugar violated the Local Rule when she sold her residence before obtaining the bankruptcy court‘s permission.
1.
Sugar raises two threshold arguments challenging whether the bankruptcy court could even consider the applicability of the Local Rule to her sale: (1) the Local Rule is invalid, and (2) paying off the balance due under the Plan entitled her to immediate discharge and deprived the bankruptcy court of authority to consider any other matters. The text of the Plan leads us to reject both arguments.
Under
Nor did paying off the balance due under the Plan deprive the bankruptcy court of authority to rule on its order to show cause and the Trustee‘s motion to modify or dismiss. Sugar argues that as soon as she paid the remaining balance of her agreed-to monthly payments, she was entitled to immediate discharge under
2.
Having rejected Sugar‘s threshold arguments, wе next turn to her contentions that the Local Rule did not apply to the sale of her residence. As recited earlier, the Local Rule required Sugar to obtain an order authorizing the disposal of “any non-exempt property” valued at more than $10,000. EDNC Local Rule of Bankruptcy 4002-1(g)(4) (directing that “[a]fter the filing of the petition and until the plan is completed, the debtor shall not dispose of any non-exempt property having a fair market value of more than $10,000 by sale or otherwise without prior approval of the trustee and an order of the court“). In one fashion or another, each of Sugar‘s arguments rests on the mistaken belief that her residence did not constitute “non-exempt property” subject to this Local Rule.
First, Sugar contends that the North Carolina homestead exemption, regardless of the plain language of the statute, exempted the entire property not subject to a lien from the bankruptcy estate. In effect, Sugar‘s argument simply rewrites the statute contrary to its plain meaning and we reject this argument because North Carolina‘s homestead exemption is a dollar-limited exemption. With certain cavеats not relevant to this case, the
This understanding of the North Carolina homestead exemption is not novel, as we have previously held the same, albeit in an unpublished decision, recognizing: “this exemption stands in contrast to exemptions which pertain to certain property in kind or in full regardless of value.” Reeves v. Callaway, 546 F. App‘x 235, 237 (4th Cir. 2013) (per curiam). In the context of the Chapter 7 bankruptcy at issue in that case, we rejected the debtors’ argument that claiming the North Carolina homestead exemption “removed [the] Residence in its entirety from the bankruptcy estate, such that the bankruptcy court lаcked statutory authority to grant the Trustee permission to sell it.” Id. at 239. Rejecting that proposition as “without merit,” we noted its “fatal flaw” as “ignor[ing] the distinction between exempting an asset itself from the bankruptcy estate and exempting an interest in such asset from the bankruptcy estate.” Id. While the exemption entitled the debtor to the statutory portion of the residence‘s value, it did not entitle the debtor to claim the residence as a whole as exempt from the control of the bankruptcy court. Id. at 241-42. While the differences between Chapter 7 and Chapter 13 proceedings distinguish what can be done
Next, Sugar contends that even if the North Carolina homestead exemption allowed her to exempt only a dollar amount, the residence was nonetheless properly classified as “partially exempt” rather than “non-exempt.” As support, she points to dictionary definitions for the prefix “non-,” such as “not” or “no,” and argues that those absolutes are not the same as being partly so. This argument is too clever by half. As the bankruptcy court aptly observed, “[p]roperty, depending upon value and liens, may have aspects of both exempt and non-exempt property.” J.A. 736. And that is true of Sugar‘s residence, which comprised three parts: (1) the part subject to liens and not the focus of this argument; (2) the part Sugar claimed as exempt under the North Carolina homestead exemption; and (3) the part (her equity) that remained, if there was any difference between the market value and the sum of (1) and (2). This third part is properly classified as “not exempt.” Thus, it could be equally correct to describe Sugar‘s residence as “partially exempt” or “partially non-exempt,” but neither use of the qualifier “partially” transforms what is not exempt into what is exempt or vice versa. By its plain terms, the Local Rule applied to the disposal of any of Sugar‘s non-exempt property valued at over $10,000. As a practical matter, Sugar chоse to sell the entire residence, which comprised exempt and non-exempt parts, but that blended reality of the one transaction did not somehow relieve her of complying with the Local Rule. Because Sugar‘s decision involved the sale of non-exempt property valued at
Last, Sugar contends that the Local Rule did not apply because the Plan provided for property to vest with her upon Plan confirmation, at which point the entire residence was removed from the bankruptcy estate and thus no longer “exempt” or “non-exempt.” We have previously recognized that “when property vests in the debtor, it vests ‘free and clear of any claim or interest of any creditors provided for by the plan.‘” Trantham v. Tate, 112 F.4th 223, 231 (4th Cir. 2024) (quoting
Those general principles rejecting Sugar‘s argument apply with particular force here given that her Plan expressly limited her conduct relating to vested property, particularly by continuing to subject her to the Local Rule she now says did not apply to her.
****
For the reasons explained, we reject each of Sugar‘s arguments challenging the district court‘s determination that she violated the Loсal Rule when she sold her residence without a court order.
B.
The question of whether there was a violation of the Local Rule (and thus the Plan) is distinct from the issue of what consequences are appropriate to redress that violation. And before discussing separately the bankruptcy court‘s decisions as to Sugar and Sasser, we first address some overarching principles that a court must consider in reaching its determination.
Bankruptcy courts have a “broad grant of judicial power set forth in
Beyond
The Supreme Court has offered some direction on when dismissal is appropriate under
Intertwined with those concepts is the bankruptcy court‘s authority to hold a party in civil contempt and impose appropriate sanctions against parties or attorneys. That authority can derive from
The Supreme Court emphasized in Taggart that an “objective” standard applies when determining whether to impose such sanctions, meaning that there must not be “a ‘fair ground of doubt’ as to whether the . . . conduct might be lawful.” 587 U.S. at 565.
In addition to these overarching rules pertinent to sanctioning parties and attorneys in a bankruptcy proceeding, the EDNC specifically authorizes sanctions when “any attorney or party willfully fails to comply with any Local Bankruptcy Rule of this court.” Rule 9011-3(a). And whenever a bankruptcy court holds parties or attorneys in contempt, it has “broad discretion” to fashiоn an appropriate sanction. De Simone v. VSL Pharms., Inc., 36 F.4th 518, 535-36 (4th Cir. 2022).
Given the above principles, there‘s no question that the bankruptcy court had the authority to enter the orders that it did in this case as to both Sugar and Sasser.8 The question then becomes whether it correctly exercised that authority on the record before it.
(Continued)
1.
We consider first the bankruptcy court‘s decision to dismiss Sugar‘s bankruptcy proceeding and impose a five-year prohibition on refiling for bankruptcy. For the reasons that follow, we vacate the judgment against Sugar and remand so that the bankruptcy court can fully assess and explain the remedy it decides to impose as a consequence of the violation of the Local Rule and her confirmed Plan.
To put it briefly, the court‘s entire analysis as to Sugar suffered because it failed to consider what, if any, effect evidence that she acted according to Sasser‘s incorrect advice that her residence was exempt and that she did not need to obtain a court order before selling her residence. This fundamental omission connects to our other concerns with the adequacy of the court‘s exрlanations about why dismissal was warranted and why an additional five-year prohibition on refiling a bankruptcy petition was also included.
We begin by briefly recounting the uncontradicted record evidence showing that Sugar relied on Sasser‘s advice when selling her residence during her Chapter 13 bankruptcy proceeding. Throughout her testimony during the show-cause and motions hearing, Sugar repeatedly expressed that when her realtor and others involved in the sale of her residence raised the issue of whether a court order was necessary to proceed, she
Consistent with Sugar‘s representations, Sasser‘s later testimony during the sanctions hearing confirmed that he had advised Sugar that her property was fully exempt and that she did not need a court order before selling her home, and that he reiterated that view to those involved in the sale of her property. On this record, Sugar may well have a viable argument that she reasonably believed that her actions complied with her Plan and any governing rules, and that she formed that belief and acted based on the advice of Sasser, her bankruptcy attorney.
Our concern about the potential effect that advice of counsel may have in the overall assessment of bad faith is particularly acute given that the district court concluded that Sugar‘s conduct was “indicative of bad faith” based on several events that were directly tied to information within the specialized knowledge and counsel of her bankruptcy attorney. Principally, of course, was the failure to abide by the Local Rule. But the bankruptcy court also pointed to its usual practices when non-exempt property accrues in value, information that Sugar cannot be expected to know given that she is a one-time debtor (not a repeat filer) and her attorney repeatedly told her that her residence was exempt. The court also reasoned that “[e]ven if thе Debtor did not believe the Local Rule applied to the sale of the [residence], the proper course of action would have been to request confirmation from the court.” J.A. 739. However, that again imputed to Sugar—who was represented by counsel in her Chapter 13 proceeding—the responsibility and duty to ignore her lawyer. Similarly, the bankruptcy court appears to have faulted Sugar for not personally “attend[ing] the status conference scheduled to inquire about the potential sale of the
The bankruptcy court‘s failure to consider the totality of the circumstances demonstrated in the record is particularly troubling here given that it had the option of imposing several less-harsh remedies to address Sugar‘s changed financial condition and violation of the Local Rule, including modification of the Plan or conversion to Chapter 7. The bankruptcy court‘s explanation must be sufficient to understand the nature of its findings as to what about Sugar‘s own conduct warranted the specific remedy of dismissal. Here, the court‘s explanation fell short.
We note, for example, that the bankruptcy court‘s analysis of bad faith and cause to dismiss interchangeably referred to Sugar and Sasser‘s acts and representations as one, and it failed to consider how advice of counsel factored into its assessment of bad faith on the part of Sugar. And, specifically, it failed to consider this component in explaining what about her entire conduct, a significant part of which was her reliance on Sasser‘s advice, was egregious enough to warrant dismissal. Because evidence in the record demonstrates that Sugar relied on Sasser‘s incorrect advice that her residence was exempt and that no court order was required, and because the bankruptcy court did not consider that evidence as part of its determination that “cause” to dismiss existed under
Apart from
Pulling these principles together reflects the following implications for Sugar‘s case. Advice of counsel would be relevant to determining whether to impose sanctions because it could negate a finding of “willfulness,” which is required to impose sanctions under the local rule authorizing them. E.D.N.C. LBR 9011-3(a); see In re Walters, 868 F.2d at 668.
For these reasons, Sugar‘s reliance on advice of counsel was directly relevant to the bankruptcy court‘s decision whether to impose sanctions in the form of dismissal or a prohibition on filing for bankruptcy for five years. Yet the bankruptcy court did not consider that factor at all, which was error and requires consideration on remand.
2.
In contrast to Sugar, Sasser bears full responsibility for his actions advising Sugar incorrectly in this case. The record ably supports that the bankruptcy court did not abuse its discretion in sanctioning him with a fine of $15,000. Notably, Sasser‘s chief argument in opposing the order against him is to reiterate that the sale of Sugar‘s residence did not violate the Local Rule. But we have previously rejected that argument.
The record shows that Sasser has been a licensed member of the bar for over two decades, and has practiced consumer bankruptcy law in North Carolina for most of that time. He has appeared in numerous Chapter 13 bankruptcy cases not just in the Eastern District of North Carolina, but before the same bankruptcy judge presiding over Sugar‘s Chapter 13 proceeding. The bankruptcy court reasonably held Sasser responsible for
Of particular concern leading to the bankruptcy court‘s determination was Sasser‘s advicе to Sugar he knew to be wrong based on a prior decision by the same bankruptcy judge interpreting the scope of the Local Rule in similar circumstances in a case in which Sasser represented the debtor. In re Pulliam, No. 19-03887-5-DMW, 2020 WL 1860113 (Bankr. E.D.N.C. Apr. 13, 2020). The court‘s ruling in that case informed Sasser of numerous legal rulings that rejected identical arguments (and variants of arguments) he made in that case, and that he later made in Sugar‘s case regarding whether the Local Rule applied to vested property, the scope of North Carolina‘s Homestead Exemption, and the effect of paying off an unpaid balance due on the Plan when the Plan‘s applicable commitment period had not ended. Whatever Sasser‘s views of the propriety of the bankruptcy judge‘s decision in Pulliam, he did not challenge it in an appeal. Nor did he preemptively raise these arguments as grounds for not requiring Sugar to obtain a court order before she attempted to sell her residence.12 Instead, he waited to raise his arguments against the applicability of the Local Rule to the sale of Sugar‘s residence only after advising his client in a manner inconsistent with the Plan аnd only after Sugar had sold her property without a court order. Further, his advice fell well after this Court and the
Relatedly, the docket in Sugar‘s Chapter 13 proceeding also demonstrates that Sasser had reasonable notice that the Local Rule would apply to the sale. As just two examples, the Bankruptcy Administrator filed the motion for a status conference directly in response to the potential sale of the residence without a prior court order and Sasser decided to file a motion for a court order authorizing the sale that he later withdrew. Thus, the concern about the Local Rule‘s applicability had been flagged in advance of the sale.
In affirming the bankruptcy court‘s sanction order against Sasser, we want to bе clear that attorneys are called to diligently represent their client‘s interests and that fulfilling this duty does not immediately expose them to potential sanctions. Attorneys can and should advance viable positions with uncertain and unsuccessful outcomes or encourage changes in the law in a manner that is consistent with the court‘s rules and the proper times for doing so. But that is not the type of conduct that formed the basis of the bankruptcy court‘s sanctions against Sasser. Here, the court cited Sasser‘s reckless advice
Because the record fully supports the bankruptcy court‘s determination that Sasser willfully advised his client to violate the Local Rule and there was “no fair ground of doubt” as to whether the Plan and the Local Rule permitted the salе of Sugar‘s residence without a prior court order, we affirm the order of monetary sanctions against Sasser. Taggart, 587 U.S. at 557 (emphasis omitted).14
III.
For the reasons stated above, we affirm the bankruptcy court‘s determination that Sugar‘s sale of her residence without first obtaining an order from the bankruptcy court violated the terms of the Local Rule, which she agreed to be bound by in her confirmed Plan. But we vacate the judgment insofar as it ordered the dismissal of Sugar‘s Chapter 13 proceeding and barred her from refiling for bankruptcy for five years. And we remand the case so that the bankruptcy court can assess the record evidence relating to Sugar‘s bad
AFFIRMED IN PART, VACATED IN PART, AND REMANDED