The case of Cody v. Charter Communications, LLC, No. 17-cv-7118-KMK (S.D. NY July 6, 2020) presents a common occurrence where a plaintiff brings a lawsuit (here a Title VII lawsuit against her former employer) but fails to disclose the lawsuit to her bankruptcy trustee or to the district court. (I have seen this happen several times in my career. Most people don’t understand that a lawsuit is an asset of a bankruptcy. These concepts, which are clear to lawyers, are not clear to the average person.)
Here, defendants sought sanctions pursuant to 28 U.S.C. Section 1927 and the dismissal of the action. The court allowed the plaintiff to substitute the bankruptcy trustee as plaintiff and denied the requests for sanctions with a stern warning to the plaintiff. The court was reluctant to dismiss the action because that would have harmed the bankruptcy creditors of the plaintiff.
Defendant contends that Plaintiff and her counsel have effectively lied under oath because of her misrepresentations in her Bankruptcy Action, because her statements in her deposition and in her Affidavit contradict each other, and because Plaintiff and her counsel demonstrate a continued failure to correct the misrepresentations by failing to amend her Bankruptcy Petition and/or address the tension between her Affidavit and her deposition testimony. (See Def.’s Mem. in Supp. of Mot. for Sanctions 9-16.) Defendant seeks dismissal of this Action and payment of attorneys’ fees in the first instance, but otherwise, wishes the Court to preclude Plaintiff from personally recovering from this Action. (See id. at 16-17.)
Notably, the Second Circuit has clarified that Federal Rule of Civil Procedure 11 sanctions “may be imposed on both counsel and client, while § 1927 applies only to counsel. . . . Rule 11 requires only a showing of objective unreasonableness on the part of the attorney or client signing the papers, but § 1927 requires more: subjective bad faith by counsel.” United States v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFL-CIO, 948 F.2d 1338, 1346 (2d Cir. 1991). Other than referring to Federal Rule 11 in one footnote in its briefing, Defendant does not appear to actually move under this Rule or proffer any arguments pursuant to it. (See Def.’s Mem. in Supp. of Mot. for Sanctions 12 n.4; Not. of Mot for Sanctions.) Accordingly, the Court must look for “a clear demonstration of bad faith in order to justify sanctions,” Int’l Bhd. of Teamsters, 948 F.2d at 1347 (citation omitted), and even if sanctions are required, they should be imposed to deter counsel’s purported misconduct, not necessarily the client’s, see id.
To begin, as discussed above, the Court sees no reason to dismiss this entire Action, even as a sanction for purported misconduct by Plaintiff’s counsel. Dismissal of the Action hurts Plaintiff’s creditors more than anyone else. It is true that in August 2019, Plaintiff testified at her deposition that she was under the impression that she would personally recover any damages obtained from this Action, (Chapman Aff. in Supp. of Mot. for Judgment on the Pleadings Ex. 1 (“Pl.’s Dep. Tr.”) 303 (Dkt. No. 62-1)), that she reviewed all her bankruptcy paperwork with her bankruptcy counsel and ensured that everything was true and accurate, (see id. at 26), and that she signed her Bankruptcy Petition after doing so, (id. at 317-18). It is also true that, in the course of the instant Motion practice, Plaintiff, through her counsel, has submitted an Affidavit, dated January 4, 2020, stating that her bankruptcy counsel had advised her that she did not need to review a “bunch of” “minor” “legal stuff” in her Bankruptcy Petition, and that, as a result, she “inadvertently overlooked the question regarding `pending lawsuits’.” (Pl.’s Aff. in Opp’n to Mot. for Judgment on the Pleadings ¶ 4.) Plaintiff further affirms that, at her appearance in bankruptcy court in June 2019, she was informed by her bankruptcy counsel that she only needed to disclose the existence of this Action if she was “asked the question,” which Plaintiff claims Trustee never did. (Id. ¶¶ 5-7.) Plaintiff claims that her omission of this Action from her Bankruptcy Petition was inadvertent and she simply relied on “inaccurate information” from her bankruptcy counsel because she did not “have a lot of experience in or understand the legal system,” or, at least, not enough to realize that she should have voluntarily provided this information at her appearance in bankruptcy court. (Id. ¶ 10.)
Obvious tension exists between Plaintiff’s sworn testimony that she carefully reviewed every aspect of her Bankruptcy Petition for accuracy before filing it, (see Pl.’s Dep. Tr. 26, 317-18), and that Plaintiff simply cursorily reviewed her paperwork at the advice of her bankruptcy counsel, (see Pl.’s Aff. in Opp’n to Mot. for Judgment on the Pleadings ¶ 4). But inconsistency does not necessarily prove that Plaintiff’s counsel has submitted an Affidavit that he “kn[ows] to be false.” (Def.’s Mem. in Supp. of Mot. for Sanctions 12.) Nor does it constitute an “action. . . so completely without merit as to require the conclusion that [it] must have been undertaken for some improper purpose such as delay.” In re Khan, 488 B.R. 515, 529 (Bankr. E.D.N.Y. 2013) (citations and quotation marks omitted), aff’d sub nom. Dahiya v. Kramer, 2014 WL 1278131 (E.D.N.Y. Mar. 27, 2014), aff’d sub nom. In re Khan, 593 F. App’x 83 (2d Cir. 2015). It is, of course, possible that Plaintiff gave the answer she thought she was obligated to give in a deposition and, following motion practice on the instant issues, it became necessary for Plaintiff and her counsel to reveal to the Court that Plaintiff actually did not review her bankruptcy materials as diligently as she should have. Although this may constitute a serious error that Plaintiff’s counsel should avoid in the future, the Court is not convinced that Defendant has presented a “clear showing” that Plaintiff’s counsel acted in bad faith or “completely without merit.” Id. at 529 (citations and quotation marks omitted). Defendant’s cited cases are largely inapplicable because they refer to different sanctioning mechanisms and standards and/or describe far more egregiously deceitful or dilatory behavior. See, e.g., Cine Forty-Second St. Theatre Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1067-68 (2d Cir. 1979) (imposing sanctions under Federal Rule 37 where the plaintiff’s counsel simply refused to engage in discovery requests and had “frozen [the] litigation in the discovery phase for nearly four years”); Joint Stock Co. Channel One Russ. Worldwide v. Infomir LLC, No. 16-CV-1318, 2017 WL 3671036, at *2, *31-32 (S.D.N.Y. July 18, 2017) (concluding that Rule 11 sanctions were warranted where counsel argued that his client did not have “sufficient contact with the United States or the State of New York” to come within the jurisdiction of the court but, inter alia, failed to reveal that the client’s website listed a New York address as an “authorized dealer” and that his own attorney’s fees were paid by check from a New York representative of his client), adopted by 2017 WL 4712639 (S.D.N.Y. Sept. 28, 2017); Jimenez v. City of New York, 166 F. Supp. 3d 426, 431 (S.D.N.Y. 2016) (upholding decision to sanction the plaintiff’s counsel under Federal Rule 56(h) where counsel had “attempted to suppressvarious medical records,” and had submitted an affidavit that was “more than just objectively unreasonable, [but also] absolutely fanciful”), aff’d in relevant part by 666 F. App’x 39 (2d Cir. 2016). Therefore, the Court sees no need to further sanction Plaintiff’s counsel under § 1927 at this point in the litigation.
The Court warns Plaintiff that when she provides statements under penalty of perjury, whether through testimony, forms, affidavits, or any other judicial filing, she will be held liable for those words. Even though laypeople may feel intimidated by legal proceedings, they must still diligently review the accuracy of all their judicial submissions. But, to the extent Defendant seeks sanctions beyond barring Plaintiff from prosecuting and benefiting from this Action, the Court denies Defendant’s Motion for Sanctions without prejudice. Defendant may of course seek to file a motion for sanctions again if any misconduct continues. However, given that Trustee is now prosecuting this Action and Plaintiff has been warned about the importance of being fully transparent and forthcoming in all her legal proceedings, the Court anticipates that this will not be the case.
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