Debtor's Lawyer Sanctioned for Wasting Court's Time

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By Stephanie Cumings

Aug. 10 — Trying to rehash the same baseless arguments cost a lawyer over $1,000 in sanctions in a New York bankruptcy court.

Judge Nicholas G. Garaufis agreed that the lawyer's reason for filing the “frivolous” motion was “wholly without merit,” and so the sanctions imposed were appropriate. The court also rejected the argument that the debtor lacked “representation” at a hearing, in violation of Second Circuit law, when his lawyer was unexpectedly able to attend.

Filing to Stop Eviction

Small business debtor L&M New York Inc. fell behind on its rent and was facing a $60,000 judgment and an imminent eviction. L&M filed for bankruptcy on the same day it was scheduled to be evicted. Filing for bankruptcy imposes an automatic stay, meaning it halts all actions against a debtor, including eviction.

The creditor moved to have the stay lifted so that the eviction could proceed. A hearing was scheduled on the creditor's motion for relief from the stay, which the debtor failed to oppose.

Lawyer Misses Hearing

On the day of the hearing, the debtor's attorney, Franklyn Rouse, sought an adjournment in order to postpone the hearing. Rouse wasn't actually present at the hearing, but the debtor's owner did appear.

The bankruptcy court explained it couldn't adjourn the hearing because that would just result in the stay being lifted anyway. Under Section 362(e) of the Bankruptcy Code, if a creditor moves to lift the stay, then the stay is automatically lifted after 30 days unless the court orders otherwise. Under Section 362(e)(1), an extension can only be granted if there is a “reasonable likelihood that the party opposing relief from such stay will prevail at the conclusion of such final hearing.”

Therefore, the court denied the adjournment and granted the motion for relief from the stay, finding that the debtor hadn't opposed lifting the stay and wasn't likely to prevail regardless. The debtor's owner, on her own initiative and without the attorney present, asked the court to extend the stay for two weeks, but the court refused.

Sanctions Imposed

Rouse filed a motion asking the court to rehear all the issues in the case. The creditor argued that the rehearing motion was frivolous and that sanctions should be imposed on Rouse.

Rouse eventually withdrew the motion to rehear, but the court still imposed the sanctions. Rouse appealed, arguing, among other things, that the adjournment should have been granted, that the debtor had lacked representation at the hearing in violation of the law, and that the motion he filed wasn't frivolous.

Failure to Follow Rules

The district court disagreed with Rouse on all points. Under the Judges Procedures for the bankruptcy court, Rouse was required to ask for the adjournment at least two business days before the hearing and to seek the consent of the parties. He did neither, so the district court agreed that the denial of the adjournment was appropriate.

The court also agreed that granting the adjournment would have resulted in the automatic termination of the stay because 30 days had elapsed.

Corporations Need Representation

Rouse correctly argued that corporations cannot proceed before a court pro se because, as the Second Circuit held in Jones v. Niagara Frontier Transp. Auth., 722 F.2d 20 (2d Cir. 1983), a corporation “is an artificial entity that can only act through agents.” The Fifth Circuit has similarly held in Sw. Express Co. v. Interstate Commerce Commission, 670 F.2d 53 (5th Cir. 1982) that a corporation “cannot appear in proper person as a corporation or through its corporate officer,” according to research conducted by Bloomberg BNA.

However, the court said that even though Rouse wasn't present at the hearing, he was in fact “represent[ing]” the debtor, even though he didn't appear at that particular hearing and “could not advise the court of his prior engagement until the morning of the hearing.”

“That [the debtor's owner] elected to address the court in her attorney's last-minute and unexplained absence does not mean that the court lacked the authority to lift the stay based on the record before it, or that the court was required to entertain a motion for rehearing,” the court said. “Indeed, the court would have been within its authority to proceed with the hearing and decide the motion even in the absence [the debtor's owner] (and in fact lifted the stay before [the debtor's owner] opted to address the court).”

‘Wholly Without Merit.'

Finally, the court said that Rule 9011(c) of the Bankruptcy Code authorizes a bankruptcy court to issue sanctions for frivolous motions. The court found that the arguments Rouse relied on in his motion for a rehearing, the same arguments he made on appeal to the district court, were “wholly without merit,” which supported to conclusion that the motion was frivolous and that sanctions were appropriate.

Rouse represented himself in the appeal.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/In_re_LM_NY_Inc_No_13CV5422_NGG_2015_BL_252569_EDNY_Aug_05_2015_C