Opinion ID: 6501098
Heading Depth: 2
Heading Rank: 1

Heading: facts and proceedings in the bankruptcy court

Text: This matter came before the bankruptcy court after Elizabeth Bagsby, acting without counsel and as Administratix of her late mother’s probate estate, filed a fifth bankruptcy case in Gayle Bagsby’s name on March 22, 2019. In response, the Chapter 13 Trustee (the “Trustee”) filed two motions. The Trustee first moved to dismiss the petition because a probate estate cannot be a debtor under § 109 of the Bankruptcy Code. See 11 U.S.C. § 109(e). The Trustee then moved for sanctions against Elizabeth Bagsby for abuse of the bankruptcy system and requested that the court schedule a hearing on the issue of sanctions. Although the Trustee’s motions did not directly refer to Mr. Johnston, the motion to dismiss referenced the 2018 petition filed by Mr. Johnston on behalf of Gayle Bagsby. After holding an initial hearing on the motion for sanctions, the bankruptcy court ordered Mr. Johnston and Elizabeth Bagsby to appear and show cause as to why they should not be sanctioned for filing bankruptcy petitions on behalf of a deceased person. The bankruptcy court also requested the Office of the United States Trustee (“UST”) to investigate and inform the court of its findings. Prior to the show cause hearing, the UST filed a statement that primarily discussed Elizabeth Bagsby’s conduct, and only briefly mentioned Mr. Johnston’s involvement in the first two cases. Ultimately, the UST recommended that the bankruptcy court sanction Elizabeth Bagsby, but did not offer any recommendations regarding Mr. Johnston. Mr. Johnston (represented by counsel) and Elizabeth Bagsby (appearing pro se) both testified at the bankruptcy court’s May 15, 2019, evidentiary hearing. Elizabeth Bagsby explained that she filed the first petition in 2016 “on behalf of [her] deceased mother” because the home in which she was living with her spouse was still held in Gayle Bagsby’s name—Gayle Bagsby died intestate, and the home was not listed as part of the probate estate. Elizabeth Bagsby also explained that she filed for bankruptcy relief on behalf of Gayle Bagsby’s probate estate because the mortgage lender was attempting to foreclose. She contacted Mr. Johnston, who recommended filing for Chapter 13 bankruptcy. She stated that Mr. Johnston filed the 2016 petition in Gayle Bagsby’s name because the mortgage loan was still in Gayle Bagsby’s name—Gayle Bagsby “was the debtor and [Elizabeth Bagsby] had been declared administratix.” The 2016 petition was dismissed soon thereafter. No. 20-5497 Johnston v. Hildebrand, et al. Page 4 In December 2018, after receiving another notice of foreclosure from the mortgage lender, Elizabeth Bagsby worked with Mr. Johnston to file a second Chapter 13 petition in Gayle Bagsby’s name. Elizabeth Bagsby testified that the 2018 petition was withdrawn because she “had submitted yet another application for a loan modification and [she] had also begun . . . applying for another mortgage with another company.” When asked if she was “aware that . . . deceased persons were not eligible to file bankruptcy,” Elizabeth Bagsby responded that she did not understand this and that she could not recall anyone telling her this information. Elizabeth Bagsby filed a “third bankruptcy to stop the foreclosure” in 2018, and a fourth in 2019. Mr. Johnston has been practicing law for approximately forty years and has been a bankruptcy lawyer for most of his career. Mr. Johnston explained that the two skeletal petitions he filed in Gayle Bagsby’s name were the only times he had ever filed a bankruptcy case for a deceased person. Further, he explained that he learned that a deceased person—or their estate—could not file for bankruptcy only after speaking with the UST in relation to the 2018 Chapter 13 petition filed in Gayle Bagsby’s name. Mr. Johnston explained that his conversation with UST led him to voluntarily dismiss the 2018 Chapter 13 petition. Mr. Johnston added that he “didn’t want to mislead anybody.” At no point between filing the 2016 and 2018 petitions did Mr. Johnston research whether a decedent’s estate could file for bankruptcy. Mr. Johnston testified further that he was trying to file the bankruptcy petitions for the probate estate, so he had Elizabeth Bagsby sign the bankruptcy petitions as “administratix of the estate.” Then, when asked why he used the signature of Gayle Bagsby, without any indication that it was used in a representative capacity, or any additional clarifying information, Mr. Johnston testified that his law firm’s software prevented him from uploading Elizabeth Bagsby’s wet signature indicating that she signed the petition in a representative capacity for Gayle Bagsby. Mr. Johnston testified that he filed the skeletal petitions in both 2016 and 2018 because both filings were made on the eve of foreclosure. After Elizabeth failed to provide the information or documents needed to prepare the schedules in either case, he never filed the required schedules or Bankruptcy Rule 2016 fee disclosures. When asked why he never disclosed the $1500 in fees he received for filing the 2016 petition, and the $690 he received for filing the 2018 petition, Mr. Johnston No. 20-5497 Johnston v. Hildebrand, et al. Page 5 testified that he usually filed the Rule 2016(b) fee disclosures with the schedules. After Elizabeth Bagsby “never brought in any information,” he never filed the schedules or the fee disclosures. The day after the hearing, the bankruptcy court reopened the 2016 and 2018 two bankruptcy cases Mr. Johnston filed at Elizabeth Bagsby’s request. After considering Mr. Johnston’s testimony, the court found that his conduct in the 2016 and 2018 petitions warranted sanctions. The court noted Mr. Johnston’s claims that 1) he was not aware that a probate estate was ineligible to file for bankruptcy, and 2) he believed he was filing on behalf of a probate estate. The court then noted that Mr. Johnston’s lack of research raised serious questions regarding his “motivations and competence.” The bankruptcy court found that Mr. Johnston signed the 2016 petition as Gayle Bagsby’s attorney, not as the estate’s attorney. More specifically, the court noted: Nowhere in any of the filings [of the 2016 case] is there any indication that Gayle [Bagsby] was deceased at the time of filing, that a probate estate even existed, or that the case was filed on behalf of her probate estate. Nowhere is there any indication that someone else besides Gayle [Bagsby] authorized the petition or signed it. Further, the court noted that Mr. Johnston’s testimony regarding his use of the software to upload the required signatures was undermined by “his actions in that the plan filed in the second case contain[ed] his wet signature as [Gayle Bagsby]’s attorney.” The court then discussed several questions raised by Mr. Johnston’s testimony and conduct, including how Mr. Johnston planned to conduct meetings required under § 341, what documents would demonstrate proof of income to fund a Chapter 13 plan, and what Mr. Johnston’s practices were for determining a debtor’s eligibility for bankruptcy relief. In particular, the bankruptcy court asked, “[h]ow could Mr. Johns[t]on, an attorney with decades of experience, truly believe Gayle [Bagsby] was eligible for relief under the [Bankruptcy] Code?” The court cited multiple cases explaining that a decedent’s estate could not seek relief because the estate could not provide the documents required to be filed with a petition, testify at a § 341 hearing, fund a payment plan, and, ultimately, because providing such relief would not further the general policy of bankruptcy. In light of these facts and observations, the court noted: All of the circumstances, the statute, and good old fashion[ed] logic compel the conclusion that Mr. Johnston did not believe he could file a Chapter 13 case on behalf of Gayle or her probate estate, or that he even did file for Gayle or her probate estate. No. 20-5497 Johnston v. Hildebrand, et al. Page 6 The facts do not support a conclusion that Mr. Johnston could have possibly thought that – in a stretch that boggles the mind – Gayle or her probate estate were eligible for relief and would perform under Chapter 13. No, Mr. Johnston filed the Chapter 13 in Gayle’s name at Elizabeth’s request, and after accepting payment of attorney fees and court costs – a fact he failed to disclose – with the sole intention of delaying the foreclosure. To aggravate matters, he did it TWICE. Based on its findings, the court concluded that Mr. Johnston failed to follow multiple rules and regulations. The court found that Mr. Johnston violated Bankruptcy Rule 9011 by signing and filing the accompanying statement of Gayle Bagsby’s social security number. The court also found that Mr. Johnston failed to make the required disclosures of the fees he received for filing the two Chapter 13 petitions, in violation of § 329 and Bankruptcy Rule 2016(b). Third, the court found that Mr. Johnston violated ethics regulations and local bankruptcy rules pertaining to competence and candor. As a result, the court concluded that Mr. Johnston’s actions in filing the 2016 and 2018 petitions on behalf of an ineligible debtor were unreasonable under the circumstances. Finally, because Mr. Johnston’s actions were unreasonable under the circumstances, the court imposed sanctions sua sponte, including (1) a 90day suspension from filing new bankruptcy petitions, (2) completing ten hours of continuing legal education courses in ethics, and (3) self-reporting to the Tennessee Board of Professional Responsibility. Mr. Johnston, proceeding through counsel, appealed the Order to the BAP, which affirmed. In re Bagsby, 2020 WL 2025906 at . The BAP construed his appeal as a challenge to the bankruptcy court’s interpretation of Bankruptcy Rule 9011 and the standard bankruptcy courts must apply when determining whether to impose sanctions. Id. at . The BAP determined that the bankruptcy court applied the proper rule and standard when it found that Mr. Johnston’s conduct in filing the 2016 and 2018 cases was unreasonable under the circumstances. Id. at -6. The BAP also examined Mr. Johnston’s argument that the evidence did not support the imposition of sanctions and concluded that the bankruptcy court did not clearly err, and therefore, did not abuse its discretion when it issued sua sponte sanctions against Mr. Johnston. Id. at . This appeal followed.2 2 Neither Trustee nor UST argued or moved for sanctions against Mr. Johnston in the bankruptcy court. However, after the bankruptcy court acknowledged Mr. Johnston’s agreement to disgorge the compensation he received for filing the two petitions, UST requested “that the fees be given to the Chapter 13 Trustee.” Trustee then immediately informed the bankruptcy court of the cost incurred for setting up a case. No. 20-5497 Johnston v. Hildebrand, et al. Page 7