Many consumer debtor attorneys have chosen to enhance their revenue by filing suit on relatively minor violations of the automatic stay or discharge. There is nothing inherently wrong with these suits since they vindicate the rights that debtors receive when they file bankruptcy. However, some practitioners have resorted to filing form complaints which go on for hundreds of paragraphs with boilerplate allegations about the callousness of the particular creditor. Recently, a creditors' lawyer fought back against exaggerated allegations in a complaint against his client and succeeded in recovering sanctions under Fed.R.Bankr.P. 9011. Defeo v. Winyah Surgical Specialists, P.A. (In re Defeo). 2021 Bankr. LEXIS 2685 (Bankr. D. S.C. 9/27/21).  What HappenedIn the Defeo case, a medical practice sent a chapter 13 debtor an invoice for $910 after bankruptcy had been filed. The debtor had not listed the debt in its schedules so the creditor was not aware of the automatic stay. Debtor's counsel contacted the creditor who followed its normal procedures to note the account as being in bankruptcy. However, due to an error in settings, the notation did not save. Several months later, the medical practice sent the debtor a second bill which stated "Your account in in default and could be sent to a collection agency. Please call."  Six days later, debtor's counsel filed a complaint which contained the following allegations ("the Disputed Allegations"):a. "[W]ith a specific intent to violate bankruptcy laws, [Defendant] contacted [Debtor] by mail dated February 3, 2021 illegally attempting to collect a $910.00 debt listed in [Debtor's] bankruptcy case." (Compl., ¶ 9.)b. "Notwithstanding being on Notice of this monetary exposure for violating the Automatic stay the Defendant chose to flagrantly, wantonly and with gross disdain and disregard violate the bedrock of the bankruptcy process." (Compl., ¶ 10.)c. "The Defendant's acts, by and through its agents, servants and/or employees, establish this creditor as one that does not hesitate to engage in overly aggressive, devious, deceptive, manipulative, oppressive, abusive and illegal collection." (Compl., ¶ 11.)d. "Upon information and belief, the Defendant knew of [Debtor's] bankruptcy filing yet willfully, deliberately and intentionally chose to ignore the automatic stay provisions of 11 U.S.C. § 362." (Compl., ¶ 13.)e. "[Debtor] would show that said aforementioned collection act [i.e., Defendant's mailing of the invoice] was done with the express intent to annoy, threaten, cause harm, abuse, intimidate or harass him." (Compl., ¶ 14.)f. "Defendant has engaged in acts which constitute a flagrant, willful, knowing and intentional violation of the bankruptcy automatic stay." (Compl., ¶ 17.)Opinion, at *4-5.. The caption of the pleading also stated: ACTUAL AND PUNITIVE DAMAGES: $50,000.  The creditors' lawyer served the debtor's counsel with its proposed motion for sanctions and waited twenty-one days before filing it. The motion alleged that the Debtor would not have included the allegations stated above in the Complaint if he had conducted even a minimal allegation and that the Complaint was filed for the improper purpose of needlessly increasing expenses.When the Debtor did not withdraw the disputed allegations, the Creditor filed his motion with the court and the court conducted a hearing.The Court's RulingThe Court noted that under Rule 9011(b):By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;* * * (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; (emphasis in original)The Court found that the plaintiff did not conduct a reasonable inquiry before making the Disputed Allegations.None of Debtor's Counsel's referenced efforts relate to the mailing of the second invoice which is the subject of the claim for willful violation of automatic stay. The record reflects a negligible, if any at all, investigation into the facts by Debtor's Counsel. It appears from the Complaint that the only evidence available to Debtor's Counsel at the time of the filing of the Complaint was the disputed invoice received by Debtor and Debtor's statements that he experienced stress and worry upon receiving that invoice.However, the Complaint contains several specific allegations regarding the mindset of Defendant, including that Defendant "chose to flagrantly, wantonly and with gross disdain and disregard violate the bedrock of the bankruptcy process" and that "the collection act was done with the express intent to annoy, threaten, cause harm, abuse, intimidate or harass [Debtor]," but there was no investigation or inquiry conducted by Debtor's Counsel whereby such a mindset or intent could have been expressed or revealed by Defendant. Debtor's Counsel admitted that neither they nor Debtor attempted to contact Defendant after the mailing of the disputed invoice. No witnesses were interviewed regarding the facts of the case. Prior to filing the Complaint, Debtor's Counsel uncovered no other communications from Defendant to Debtor, such as threatening letters, emails, calls, text messages, personal visits or lawsuits, which would support such allegations.Opinion at *12-13. After rejecting several other arguments made by plaintiff's counsel, the court found that the plaintiff's counsel failed to make a reasonable inquiry before making the Disputed Allegations.The Court did not reach the issue of whether the complaint was filed for an improper purpose, noting that the records was mixed.Under the circumstances of this case, the Court finds that the Complaint appears to have been filed for the reasonable purpose of seeking to enforce Debtor's rights under the Bankruptcy Code to be protected by the automatic stay from further collection efforts from Defendant. It also appears, however, that the Complaint was filed for the additional purpose of obtaining a substantial damages award or settlement, including attorney's fees and punitive damages, which may be unjustified under the circumstances of this case. The prominent placement of a demand for $50,000 in actual and punitive damages on the front page of the Complaint and extreme characterization of Defendant's conduct within the Complaint is indicative of Debtor's Counsel's desire to threaten and intimidate the Defendant by increasing the perceived financial risk to Defendant. This could be considered bad faith or an improper purpose that is so excessive as to eliminate the proper purpose of seeking the protection of the automatic stay on behalf of Debtor. See id. at 518. In light of the Court's finding that sanctions are appropriate under Rule 9011(b)(3), it is unnecessary for the Court to determine this issue at this time.Opinion at *25-26.The defendant's counsel sought reimbursement of $37,000 in attorneys' fees, of which approximately $13,000 related directly to the motion for sanctions. The Court found that Rule 9011 requires that the Court impose the least sanction necessary to deter future violations. It awarded $10,000 in sanctions and struck the Disputed Allegations.   What It MeansThis case illustrates why most cases settle. The defense invested $37,000 in a case over a $900 invoice and recovered $10,000 back but must still litigate the underlying stay violation. The debtor's counsel set out to vindicate its client's rights and make some money and wound up owing $10,000. The continuing interactions between these two lawyers and between the two sets of lawyers and their clients is likely to be tense going forward.  While the cost-benefit analysis for both parties has turned out badly, the opinion provides a cautionary tale to other parties in similar situations. The lesson for the plaintiff is simple. Don't use form complaints which contain outrageous allegations that bear no relation to the current case. Be prepared to file complaints which resemble the TV show Dragnet ("just the facts ma'am") more than cable news shouting matches. The secondary lesson is that if you get caught filing the complaint full of inapplicable outrage, withdraw the offending allegations when you receive the safe harbor letter. Rule 9011 encourages parties to remedy their bad behavior. If you have a chance for grace, take it.This case illustrates the difficult position that defense counsel has in representing small creditors. While the creditor's offense was small, the debtor's threat to recover $50,000 was likely an existential threat to the creditor's continuing existence. In a more enlightened error, plaintiff's counsel would have picked up the phone and solved the problem without filing suit. However, once the suit was filed, the defendant had to hire counsel and deal with it. The logical course would be to admit liability and negotiate a minimal settlement. However, if plaintiff's counsel was unreasonable, then defense counsel would have been justified in serving the proposed Rule 9011 motion, even if there was a possibility that the plaintiff's counsel would comply with Rule 9011 and withdraw the offending allegations. What does not make sense, and what is not explained by the record, is why the defense counsel would spend nearly $37,000 on such a small case. Maybe the client told counsel to spend whatever it took. Maybe the case involved old grievances between the attorneys. We don't know. We just know the result.There is one other thing that defense counsel did right that I have not mentioned yet. At the same time that counsel served the proposed motion on the plaintiff, he also submitted an offer of judgment. The way an offer of judgment works is that if the plaintiff accepts the offer, the case is resolved. If the plaintiff does not accept the offer and recovers less than the amount of the offer, the plaintiff cannot recover any costs after the date of the offer. Costs is generally construed to include attorney's fees. A well drafted offer of judgment can deter a plaintiff from racking up big fees in the hopes of recovering a big judgment. Not all clients will authorize an offer of judgment, but it makes sense in a small case where liability is clear but damages should be slight. 

Bankruptcy Filings have increased in October 2021 1.8% over the prior month. This is the first time this has happened in quite a while. Does it mean there is economic stress in the future?

Federal court practitioners, particularly those appearing in bankruptcy court, are familiar with the requirements of the lodestar method for proving up attorneys' fees. Under Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974) and subsequent cases, attorneys were used to producing contemporaneous time sheets in sufficient detail to describe the work performed and the rate charged. For many years, practice in Texas state courts seemed much looser in that an attorney could simply state that he was an expert and opine that an amount of attorneys' fees was reasonable. In 2012, the Texas Supreme Court expressly endorsed the lodestar method for calculating attorneys' fees in El Apple I, Ltd. v. Olivas, 370 S.W.3d 757 (Tex. 2012). A new opinion from the Austin Court of Appeals reinforces that lodestar review cannot be evaded by redacting time entries to the point that they are meaningless. Person v. MC-Simpsonville, SC-1-UT, LLC, 2021 Tex. App. LEXIS 7155 (Tex. App.--Austin, 8/27/21).  The Court's Opinion The case involved suit on a guaranty. The landlord requested attorneys' fees of $266,000, which the trial court reduced to $248,074. The guarantors appealed arguing that the attorneys' fee invoices were so heavily redacted as to preclude review of the reasonableness and necessity of the fees awarded. In order to recover fees under Tex. Civ. Prac. & Rem. Code  Sec. 38.001, the applicant must prove both the reasonableness and necessity of the fees. Under El Apple I, the lodestar method is the way to prove reasonableness and necessity. The lodestar requires proof of "the reasonable hours spent by counsel in the case and a reasonable hourly rate for such work." To determine the reasonable number of hours worked, the court should look at "(1) the nature of the work, (2) who performed the services and their rate, (3) approximately when the services were performed and (4) the number of hours worked." The court also pointed out that the Texas Supreme Court has expressly found that "generalities . . . are not sufficient to support a fee-shifting award under the lodestar method."   The plaintiff argued that under Tex. Civ. Prac. & Rem. Code Sec. 38.003 and 38.004 that it "is presumed that the usual and customary attorneys' fees for a claim of the type described in Section 38.001 are reasonable" and that the "court may take judicial notice of the usual and customary attorneys fees and of the contents of the case file without receiving further evidence." The court rejected this argument, stating:Section 38.004 allows the trial court to take judicial notice of the usual and customary fees but says nothing about reasonableness and necessity. Section 38.003, on the other hand, creates a rebuttable presumption that the usual and customary fees are reasonable. But it is well settled in Texas that “[a] presumption is simply a rule of law requiring the trier of fact to reach a particular conclusion in the absence of evidence to the contrary. . . . The presumption disappears when evidence to the contrary is introduced.” (citations omitted). As this Court has recognized, when contrary evidence is introduced “the case proceeds as if no presumption ever existed.”  Opinion at *18-19. In this case, opposing counsel testified extensively that the plaintiff's fees were neither reasonable nor necessary. This was sufficient to rebut the presumption. The court then explained that the billing entries submitted were so heavily redacted that they could not meet the plaintiff's burden of proof. In the present case, while some of the billing entries in the record showed with reasonable clarity the types of tasks that were performed, the redactions eliminated virtually all specificity about those tasks and therefore largely prevented a meaningful evaluation of their reasonableness and necessity. For example, the majority of entries on the redacted billing records show only that an attorney or other legal professional had a telephone conference with somebody about something, emailed somebody about something, discussed something with somebody, reviewed something, researched something, drafted something, coordinated something, or worked on something. As a whole, the redacted billing records admitted in evidence were not sufficient, in light of the supreme court’s admonitions in Rohrmoos concerning the need to identify specific tasks performed, to allow the trial court to evaluate the reasonableness and necessity of hours worked that gave rise to nearly a quarter million dollars of attorney’s fees.* * *As discussed above, the lodestar method requires a showing of both reasonable and necessary hours worked and a reasonable hourly rate. (citation omitted). Without detailing it, we believe the evidence here is sufficient to show that the rates charged by MC-Simpsonville’s attorneys were reasonable. In light of the supreme court’s requirement of specificity regarding the services performed, however, we conclude that the evidence of reasonableness and necessity of the hours worked does not meet the supreme court’s standards. The billing records were too obscured by redactions, and the testimony of the two primary attorneys for MC-Simpsonville was too general, to allow the trial court to determine whether the hours worked were reasonable and necessary. Therefore, the evidence presented by MC-Simpsonville was not sufficient for a meaningful review of the fee application. Accordingly, we hold that the proof in this case did not provide the trial court legally sufficient evidence to calculate a reasonable fee award using the lodestar method. Opinion, at *20-23. As a result, the court reversed the award of attorneys' fees and remanded for a redetermination.Practice PointsThis opinion does an outstanding job of summarizing the leading supreme court cases on attorneys' fees, including Arthur Anderson & Co. v. Perry Equipment Corp., 945 S.W.2d 812 (Tex. 1997), El Apple I, Ltd. v. Olivas, supra, and Rohrmoos Venture v. UTSW DVA Healthcare, LLP, 578 S.W.3d 469 (Tex. 2019).  Taken together, these cases show that for a period of over twenty years, the Texas Supreme Court has been requiring a level of proof to establish attorneys' fees. However, because of the presumptions in sections 38.003 and 38.004, it is possible for sloppy, imprecise testimony to support an award of attorneys' fees. It is not unprofessional for one attorney to question another attorney's poorly supported demand for fees. Attorney fees are simply an amount of damages which must be proven through competent evidence. When an opposing counsel fails to offer countervailing testimony, the presumption applies and unjustified fees may slide through unchallenged.Finally, state court attorneys must learn what bankruptcy attorneys have long been required to do. Time entries must be worded so that they will convey the nature of the work performed without revealing privileged communications. Three examples illustrate this point.11/3/21    0.5     Spoke to ________ about ______. As pointed out by the court, this type of redacted time entry fails to convey enough specific information to be useful.11/3/21    0.5    Spoke to Mr. Jones about not mentioning the product safety studies showing client's product is extremely dangerous.This time entry discloses confidential information and professional misconduct as well.11/3/21       0.5    Spoke to Mr. Jones about his upcoming testimony on the issue of product safety.This is the time entry which is "just right." It shows that the attorney spoke to the witness to prepare him for an aspect of his testimony without concealing the subject matter or revealing too much.   Drafting time entries which disclose enough detail to justify a fee award requires both attention and practice. Bankruptcy attorneys who are required to submit fee applications have been practicing this discipline for many years. It appears that the Texas courts are going to require that their attorneys meet the same standard as well if they wish to recover attorney fees.  Hat tip to Matt Garcia for sending me the opinion.

 https://www.nytimes.com/2021/11/03/nyregion/nyc-taxi-drivers-hunger-strike.html

If you live in Pennsylvania and are receiving Social Security Disability benefits, either through Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), you understand how challenging a complex the process is. Obtaining your benefits required a significant amount of time, energy, and documentation. Unfortunately, obtaining benefits is not the end of the process. […] The post What Happens at a Disability Benefits Review in Pennsylvania? appeared first on .

Dealing with a disabling condition can be incredibly difficult, especially when attempting to obtain government benefits to assist you financially. But these benefits may be necessary if your impairments leave you unable to work. You may be wondering if you can just get your own doctor to provide you with approval for disability benefits. Unfortunately, […] The post Can a Doctor Put You on Disability in Pennsylvania? appeared first on .

Thousands of Pennsylvanians rely on Social Security Disability benefits to pay for necessary expenses. The Social Security Administration (SSA) manages two distinct programs that provide monthly benefits to disabled individuals. The extent that you can own property and maintain your benefits depends on which program governs your disability benefits. Social Security Disability Insurance (SSDI) does […] The post Can You Own Property and Be On Disability in Pennsylvania? appeared first on .

For many people in Pennsylvania, the student loan crisis is real. Their monthly mortgage, rent, utilities, and other necessary expenses are difficult to pay because of their student loan payments. Bankruptcy provides people drowning in debt relief and protection under the federal Bankruptcy Code. Unfortunately, discharging student loan debt is almost impossible. However, this does […] The post Can You File for Bankruptcy to Avoid Defaulting on Your Student Loan in Pennsylvania? appeared first on .

 https://www.nytimes.com/2021/10/25/nyregion/gene-freidman-dead.html

 “One pill makes you largerAnd one pill makes you small….”— “White Rabbit” by Jefferson AirplaneSenior Care Centers Inc., a chain of skilled nursing facilities, accomplished the feat of filing once as a complex chapter 11 case in 2018 (“First Case”) and then re-filing as a small business debtor in 2021 (“Second Case”). This success can be attributed to its ability to shed debt in its First Case, as well as in its decision to exclude its operating subsidiaries (and their debt) from its Second Case.In 2018, the company sought bankruptcy protection in the Northern District of Texas in Case No. 18-33967 and requested complex case status based on having more than $10 million in debt and more than 50 parties in interest. It emerged a year later with a confirmed plan that was substantially consummated in March 2020. Under the plan, it pared back its operations from more than 100 facilities to approximately 22 of its best-performing locations.In 2021, it filed a new case, along with parent company Abri Health Services, LLC, in Case No. 21-30700, and it elected to be treated as a small business debtor filing under subchapter V of chapter 11.Some Background on Large and Small CasesThe “complex” case designation is not found in the Bankruptcy Code. It references a series of procedures adopted by local rules in various bankruptcy courts to allow the court to more efficiently deal with larger cases.[1] The complexity of the original Senior Care Centers case is shown by the fact that the case has over 3,000 docket entries.Subchapter V was added to the Bankruptcy Code and went into effect on Feb. 20, 2020. Initially, subchapter V was only applicable to cases with aggregate debt of $2,725,625.[2] However, just one month later, on March 27, 2020, this debt limit was temporarily increased to $7,500,000 by the CARES Act. The debt limit will revert to the original level on March 27, 2022, unless extended by Congress. Subchapter V includes several provisions designed to make smaller cases more affordable. There is no creditors’ committee,[3] disclosure statements are not required,[4] and the absolute priority rule is replaced by a disposable-income requirement.[5]How Did the Cases Change?In the First Case, Senior Care Centers and its affiliates entered bankruptcy with $45.56 million in secured asset-based-lending debt.[6] The debtor had $4.33 million in additional secured debt and owed $35 million to landlords. Finally, the debtor owed $36.7 million in unsecured trade debt. Thus, when Senior Care Centers entered the First Case, it had over $120 million in debt and truly qualified as a “complex case.”When Senior Care Centers filed the Second Case, it reported just $3,065,730 in debt, nearly all of which was unsecured. The schedules stated that $500,000 of unsecured debt consisted of claims classified as “Holders of Allowed Convenience Class Claims” under the plan in the First Case, and that $2,494,717.62 consisted of rent owed to a landlord with which the debtor had ongoing difficulties. The parent company, Abri, listed $2,676,709.02 in debt consisting primarily of the same rental obligations.Going from $120 million to $3 million in debt is a major feat. Part of this reduction was accomplished by the deleveraging of the company’s balance sheet, which occurred in the First Case. The substantial amounts of secured debt were refinanced and then paid after the First Case, leaving the parent companies relatively debt-free. However, the second reduction in debt came from the decision of which debtors filed bankruptcy. In the First Case, Senior Care Centers filed along with its operating subsidiaries, which had the unsecured trade debt.In the Second Case, only the two parent companies filed. TXMS Real Estate Investments Inc., the landlord with the large claim in the Second Case, objected to the debtors’ designation as a small business debtor, claiming that they were seeking “to have their cake and eat it, too.” Apparently Senior Care Centers Inc. and the operating entities were all parties to a master lease with TXMS. When Senior Care Centers filed bankruptcy, it contended that the automatic stay prohibited TXMS from terminating the master lease, thus protecting the nondebtor operating entities. However, because the operating entities did not file, Senior Care Centers sought to have their trade debt excluded from the subchapter V eligibility calculation.The court has not heard the objection, so it is not known whether Senior Care Centers’ strategy to take advantage of subchapter V will succeed. However, its strategy appears to make financial sense. A complex case has complex costs for the debtor. In the First Case, Senior Care Centers was dealing with a panoply of debt. In the Second Case, it was dealing primarily with a single creditor. By limiting the entities that filed, Senior Care Centers could attempt to achieve a more cost-effective remedy for dealing with what it described as a recalcitrant lessor.[1] See, e.g., U.S. Bankruptcy Court for the Northern District of Texas, Local Rules, Appx. E, Procedures for Complex Chapter 11 Cases.[2] 11 U.S.C. § 101(51D).[3] 11 U.S.C. § 1181(a).[4] 11 U.S.C. § 1181(b).[5] 11 U.S.C. § 1191(b).[6] Disclosure Statement for Third Amended Plan, p. 5.