New York Bankruptcy Court Denies Rule 11 Motion as Untimely

The timeliness of a Rule 11 motion is an issue which has not been adequately addressed by the courts. The issue can arise in the following situation: you represent a client and you file a claim. Some time later you withdraw from the case with the claim still pending. After you have withdrawn, the claim is dismissed and the opposing party files a Rule 11 motion against you. In re Patsy Fierro, No. 14-41439 (Bankruptcy Court E.D. New York, March 31, 2020).

Early in the case a creditor filed a claim that a debt was not dischargeable under the Bankruptcy Code. (A non dischargeable debt remains with the debtor after the bankruptcy). The lawyer withdrew and eventually the claim was rejected. 18 months after the lawyer withdrew the debtor file a Rule 9011 (Rule 11 in Bankruptcy Court) motion against the creditor and its lawyer. The court denied the sanctions motion. The court found that the lawyer acted appropriately and that the sanctions motion was untimely. The key fact is that when the lawyer withdrew there was no sanctions motion pending nor was there any threat that the other party would file such a motion.

Because it is not patently clear that the claims had no chance of success, it cannot be said that they were groundless. Thus, Kipiniak [Lawyer] and J.C. Ryan [Her Client] were under no obligation to withdraw the Proofs of Claim or the Non-Dischargeability Actions during Kipiniak’s time as lead counsel. This case can be distinguished from Fuerst v. Fuerst, where the District Court for the Eastern District of New York found that sanctions under Rule 11 were appropriate where an attorney failed to withdraw a complaint. 832 F.Supp.2d 210, 220 (E.D.N.Y. 2011). There, the parties previously signed a settlement agreement that released the claims brought in the complaint, causing the court to find that the complaint was groundless, as there was no longer a legal or factual basis to assert the causes of action. See id. Here, the Default Judgment was still in place at the time Kipiniak was lead counsel, and thus there was still a legal and factual basis to maintain the Proofs of Claim and the Non-Dischargeability Actions. As such, the actions of Kipiniak and J.C. Ryan were objectively reasonable pursuant to the Rule 9011(b) standard. See In re Beinhauer, 570 B.R. at 137. Consequently, the Court does not find sanctions appropriate under Rule 9011(b)….

This Court also finds that the Motion is untimely as to Kipiniak. Although the Debtors sent Kipiniak the Demand Letter on November 16, 2015, the Debtors did not properly comply with Rule 9011(c) until they served the Motion on April 28, 2018, which is eighteen months after Kipiniak was active in this matter. See Star Mark Mgmt., Inc. 682 F.3d at 175 (“An informal warning in the form of a letter without service of a separate Rule 11 motion is not sufficient to trigger the 21-day safe harbor period.”). This conclusion is supported by this jurisdiction’s recent holding in Goodwin v. MTA Bus Co. where the court found that Rule 11 sanctions were improper, in part, because the moving party waited approximately two years after the alleged sanctionable conduct to file the sanctions motion and the attorney they were seeking to sanction had already withdrawn from the case. 2017 U.S. Dist. LEXIS 41555, at *10 (E.D.N.Y. Mar. 22, 2017). The court explained that awarding sanctions would “defeat the goal, apparent from the text of Rule 11(c)(2) of streamlining litigation by allowing the party in the wrong the first opportunity to withdraw an offending paper.” Id. (internal quotations omitted). While it is true that Kipiniak never filed a formal notice of withdrawal, the record reflects she did not appear and argue on behalf of J.C. Ryan on any matters after October 2016. Even if the Debtors met the Rule 9011(b) standard, Kipiniak was no longer suited, in April 2018, to withdraw the Proofs of Claim and the Non-Dischargeability Actions. See In re Pennie & Edmonds LLP, 323 F.3d 86, 89 (2d Cir. 2003) (“[M]otions have been disallowed as untimely when filed after a point in the litigation when the lawyer sought to be sanctioned lacked an opportunity to correct or withdraw the challenged submission.”).

Comment: I agree wholeheartedly with this opinion. It is almost impossible to second guess the decisions of a lawyer who withdrew from a case (with no sanctions motion pending or threatened). In my career, on two occasions I had to defend sanctions motions that were filed after a hard fought case had concluded. In both instances the sanctions motion was denied.

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