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Tech Bankruptcy
November 19, 2014
  Better Check the 'Net First
In a swan song before retiring from the bench, bankruptcy judge James Gregg penned an interesting decision in In re Hale, 2014 WL 2922347 (Bankr. W.D. Mich. 2014) touching on an attorney's obligation to do an on-line real estate search before filing a consumer bankruptcy case. After a chapter 7 trustee discovered, two years into the bankruptcy case, the debtors' ownership interest in previously undisclosed real estate, the debtors sought to convert their case to chapter 13. Judge Gregg held that the motion to convert was filed in bad faith and denied it. The court also denied an attempt by the debtors to exempt their interest in the previously undisclosed property.

None of this is particularly novel. So far. But, then, in a section of the opinion captioned "What Now? How These Circumstances Could Have Been Avoided and Possible Sanctions" Judge Gregg delved into the debtors' counsel's obligations under F.R.B.P. 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... is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances [list of four different categories]." .... Dietrich submitted the Debtors' erroneous schedules to the court. He therefore faces "presenting" sanctions unless a reasonable inquiry was made."

Judge Gregg believed that debtors' counsel had not, in fact, made a reasonable inquiry. Why not? Because the Judge (or someone in his office - the opinion does not state) was able to go online and discover the debtors' concealed real estate interest in "less than five minutes." Certainly, debtors' counsel or a paralegal could have, and should have, made a similar investigation given the searches' ease. Fortunately for debtors counsel, Judge Gregg did not actually impose sanctions, citing both the benefit of hindsight and the desire, given his pending retirement, to not impose the sanctions process on another judge.

While Judge Gregg is certainly correct about the ease of performing such searches in many jurisdictions and most situations, it's a bit of a slippery slope to state that not doing a real estate search prior to filing a bankruptcy case constitutes a failure to make a reasonable inquiry. The search was an easy one in the Hale case, but how easy should the search be before the attorney MUST do it. Run a grantee search for John Silva in New Bedford, Massachusetts (a heavily Portuguese town in my region) and you get twenty pages of results. Some title checks can take hours to sort through. At some point an attorney should be able to trust his client. Judge Gregg also doesn't address the fact that it took the chapter 7 trustee two years to discover the concealed real estate. Guess she didn't run a routine title check either.

Still, the warning is worth noting.
 
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Warren E. Agin is a partner in Swiggart & Agin, LLC, a boutique law firm in Boston, Massachusetts focusing on the needs of technology companies. Mr. Agin heads its bankruptcy department. The author of the book Bankruptcy and Secured Lending in Cyberspace (3rd Ed. West 2005), Mr. Agin also chaired the ABA's E-commerce and Insolvency Subcommittee from 1999 to 2005, co-chaired the Boston Bar Association's Internet and Computer Law Committee (2003-2005), and served on the American Bar Association's Standing Committee on Technology and Information Services (2008-2011). Mr. Agin currently co-chairs the Editorial Board of Business Law Today. A contributing editor to Norton Bankruptcy Law and Practice, 3d, and co-author of its chapter on intellectual property for the past fifteen years, he is author of numerous legal articles and addresses on topics of technology, internet and bankruptcy law.

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