Restructuring

Contributed by Rich Mullen
Being a member of the legal profession is a privilege that is afforded to those of us who are willing to complete three years of law school, to spend hundreds of hours studying for (and passing) the bar exam, and to swear an oath of admission before our respective states.  This privilege, however, comes with certain responsibilities, some of which are measured by Rule 11 of the Federal Rules of Civil Procedure and its bankruptcy counterpart, Rule 9011 of the Federal Rules of Bankruptcy Procedure.  In In re Obasi, No. 10-10494 (SHL), 2011 WL 6336153 (Bankr. S.D.N.Y. Dec. 19, 2011), the Honorable Sean H. Lane considered whether a law firm and an attorney with the firm should be held in civil contempt or subject to sanctions after the attorney failed to review a proof of claim that was signed with the attorney’s electronic signature and an indication that identified him as the “Creditor’s Authorized Agent,” and submitted to the bankruptcy court using the attorney’s electronic case filing login and password.  Ultimately, Judge Lane held that the conduct of the law firm and the attorney was sanctionable, but denied the United States Trustee’s request for civil contempt and sanctions because the United States Trustee did not comply with the “safe harbor” provisions of Bankruptcy Rule 9011.
The dispute arose after the debtor objected to a claim that was electronically filed on behalf of a bank, asserting that the claimant was entitled to payment based upon a mortgage.  The debtor argued that the claimant lacked standing as the proof of claim had failed to demonstrate a complete chain of title.  In connection with the objection, the attorney whose electronic signature was used to submit the proof of claim was deposed, and the signing attorney provided information concerning preparation of the claim.
The signing attorney testified that a company he partly owned, which provided paralegal and other support services to his law firm, would prepare proofs of claim and then submit them to the law firm for review.  The signing attorney gave instruction to an attorney under his supervision to review all proofs of claim provided by the company using a checklist of important issues.  After running through the checklist, the reviewing attorney would file proofs of claim with the bankruptcy court using the signing attorney’s electronic signature.  At no time would the signing attorney review any of the proofs of claim that were eventually filed with the court.
The United States Trustee took the position that this procedure, which was used to submit the claim in Obasi, violated the bankruptcy court’s General Order M-242, Bankruptcy Rule 9011, and Local Bankruptcy Rule 9011–1.
In his analysis, Judge Lane first noted that M–242 incorporates Bankruptcy Rule 9011 by stating that “the use of an attorney’s password to file a document electronically shall constitute the signature of that attorney for purposes of [Bankruptcy Rule] 9011.”  He then stated that Bankruptcy Rule 9011 requires an attorney to personally review documents that are submitted using his or her electronic signature for a “variety of reasons going to the good faith basis for and accuracy of the document’s contents.”
Judge Lane, then, went on to reject each of the arguments made by the signing attorney and his law firm.  First, Judge Lane stated that the firm’s reviewing procedures did not satisfy Bankruptcy Rule 9011’s reasonable inquiry requirement because “[t]he person signing, filing, submitting, or advocating a document has a nondelegable responsibility to the court.”  Second, while admitting that “there is no litmus test” for assessing violations of Bankruptcy Rule 9011 and that the signing attorney needed not be certain in his investigation of the claim, Judge Lane stated that the signing attorney was required to explore the claim himself because he had no way of knowing whether the reviewing attorney complied with the internal checklist.  Third, Judge Lane dismissed the argument that the signing attorney’s conduct did not violate Bankruptcy Rule 9011 because the factual allegations in the proof of claim were accurate and there was evidence to support the claim.  He stated that the accuracy of information in a proof of claim is not a defense to a Bankruptcy Rule 9011 sanction and, in any event, the proof of claim that was submitted was factually inaccurate.  Finally, Judge Lane explained the importance of proofs of claim in the bankruptcy process, and stressed that the signing attorney’s review was important because a properly filed proof of claim constitutes prima facie evidence of the validity and amount of the claim.
Ultimately, however, Judge Lane declined to issue sanctions because the Office of the United States Trustee provided no evidence that it complied with the “safe harbor” provisions of Bankruptcy Rule 9011, which require that a motion for sanctions be served upon a respondent at least 21 days before being filed with the court so that the respondent can correct any violation.  Judge Lane also noted that the signing attorney and his law firm had taken steps to remedy the proof of claim and also revised the law firm’s procedures for reviewing and filing proofs of claim.
The signing attorney and his firm avoided sanctions, but the bankruptcy court made clear that their conduct was below that which is expected from an attorney and a law firm.  The lesson from Obasi is important because, in the modern legal world, electronic signatures are used on many different types of documents on a daily basis.  While an /s/ might not be as aesthetically pleasing as the ink of a nice blue felt-tip pen, it carries the same weight and meaning.  The next time you authorize the use of your electronic signature on a document, be sure to give it proper attention and review — you are required to do so.