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In Re v. Timothy W. Hoffman

July 1, 2011


Bk. No. 09-12470 Appeal from the United States Bankruptcy Court for the Northern District of California Honorable Alan Jaroslovsky, Chief Bankruptcy Judge, Presiding

The opinion of the court was delivered by: Pappas, Bankruptcy Judge:



JUL 01 2011



Chapter 7


Argued and submitted on June 16, 2011 at San Francisco, California

Before: PAPPAS, JURY and HOLLOWELL, Bankruptcy Judges.

Gregory B. Orton ("Orton"), attorney for chapter 7*fn1 debtor Karen V. Kayne ("Van Kayne"),*fn2 appeals the order of the bankruptcy court imposing monetary sanctions of $20,000 on him pursuant to Rule 9011 and § 707(b)(4)(D). Because Orton knowingly failed to exercise due diligence as a debtor's attorney in this case, we AFFIRM.


On August 3, 2009, Van Kayne filed a petition for relief under chapter 7, along with the required Schedules and Statement of Financial Affairs ("SOFA"). The petition was "electronically" signed by Orton as her attorney: "/s/ Gregory B. Orton." Directly below Orton's signature, the following certification appears: "In a case in which § 707(b)(4)(D) applies, this signature also constitutes a certification that the attorney has no knowledge after an inquiry that the information in the schedules is incorrect."

Paragraph 4 of Van Kayne's SOFA discloses that, at the time of her bankruptcy filing, she was a party to a lawsuit, Van Kayne v. Santa Rosa Executive Ctr., pending in the Sonoma County Superior Court. The nature of that proceeding is described as an "Action on promissory note" (the "Note"). There is no other information about this action in the SOFA. In addition, no potential recovery from the action was listed in Debtor's schedule B, and no payments from the Note were listed in Debtor's income on schedule I.

Van Kayne and Orton attended the § 341 meeting of creditors on September 3, 2009, at which Timothy W. Hoffman, the chapter 7 trustee ("Trustee"), questioned Van Kayne about the lawsuit and Note. Regarding the Note, Trustee asked Van Kayne, "Is that listed in your Schedule of Assets?" § 341 Hr'g Tr. 7:24-25 (Sept. 3, 2009). Before Van Kayne could reply, Orton interjected, "No, I don't think it is, because I was under the impression that it is essentially uncollectible." Id. at 8:1-3. Trustee continued his questioning of Van Kayne:

TRUSTEE: When was the last time you received a payment on the Note?

VAN KAYNE: He did make a payment last month.

TRUSTEE: And you say you're getting a thousand what a month?

VAN KAYNE: 1,225 a month.

TRUSTEE: And, according to your calculations, if he pays you regularly through December, it'll all be satisfied in full?

VAN KAYNE: Yes, he's - he's a little bit behind, but I think he will catch up.

TRUSTEE: Well, how much is he going to have to pay [in December] to pay this thing off? . . .

VAN KAYNE: I think it's about 7,000.

TRUSTEE: I'll leave it to you whether you want to amend the Schedules, but it sounds like an asset to me. Id. at 9:3-23.

Orton told Trustee that he was surprised that payments were being made on the Note. Id. at 10:2. Trustee then observed that the $7,000 balance supposedly due on the Note would likely be exempt under the California wildcard exemption if claimed and left it to Orton and Van Kayne's discretion whether to amend the schedules to list and exempt the payments on the Note. Id. at 10:9-12.

Van Kayne and Orton never amended any of the schedules. Trustee filed a report on September 9, 2009, stating that the bankruptcy case had no assets to administer. Van Kayne was granted a discharge, and the bankruptcy case was closed, on December 7, 2009.

A month later, Trustee was contacted by an attorney for the maker of the Note, informing him that the true payoff of the Note due in December was $61,250. Acting on this information, the United States Trustee moved to reopen the case, supporting the motion with the declaration of Trustee that Van Kayne had misrepresented the payoff value on the Note as $7,000 at the meeting of creditors, and had failed to list payments on the Note in the SOFA and in the calculation of the means test. The bankruptcy court granted the motion and reopened the case on February 9, 2010. Trustee was reappointed.

Trustee then filed a motion to compel Van Kayne to turn over the Note and payments received on the Note postpetition. The motion was served on both Van Kayne and Orton. No opposition to Trustee's motion was filed by Van Kayne. The bankruptcy court conducted a hearing on the motion on February 26, 2010, where Trustee was represented by counsel, but neither Van Kayne nor Orton appeared. The bankruptcy court granted Trustee's motion and entered its order compelling turnover of property of the estate on March 8, 2010. The order directed Van Kayne to turn over to Trustee the Note and $6,250 in payments she had received on the Note postpetition.

Meanwhile, Trustee conducted a Rule 2004 examination of Van Kayne on March 3, 2010. Orton was present for the first part of the examination. While Orton was present, and under questioning by Trustee's attorney, Van Kayne admitted that she had received at least $1,250 per month in payments on the Note for the six months preceding her filing of bankruptcy, that she continued to receive payments postpetition which were current, that the payments were not listed in her schedules, and that the Note was not listed on her schedule B. Additionally, Van Kayne testified, while Orton was still in the room, that she had given a binder of all the documents relating to her bankruptcy filing to Orton before the petition was filed, which included a copy of a settlement agreement between her and the maker of the Note detailing the terms of the Note and listing the payments that had been made on the Note. Orton did not challenge these assertions. Remarkably, immediately following this testimony, and though it had not concluded, Orton left the Rule 2004 examination because he had another appointment.

Following Orton's departure, Trustee's lawyer continued the examination of Van Kayne about the Note and payments:

BARNIER [Trustee's counsel]: Did you verbally tell Mr. Orton that you were receiving cash payments on this promissory note?

VAN KAYNE: They were not cash. They were by check. BARNIER: By check. Did you tell him you were receiving payments?


BARNIER: Do you remember when you told him that?

VAN KAYNE: When I asked him to collect the money from ...

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