I realized this morning that we’ve entertained you over the last three years with Fourth of July, Thanksgiving, Christmas, and New Years posts, but never a Halloween post. What better way, then, to return from a two month blog hiatus than searching Westlaw for Halloween-themed bankruptcy cases. Except for a Kentucky judge’s cringe-worthy analogy to the movie Halloween, Freddy Krueger, and the “Jurisdictional Nightmare in Bankruptcy Court” for jury trials, I almost came up empty. But then I came upon the “Halloween Costume World” (HCW) case, John E. Hoover, III’s Chapter 13 turned Chapter 11 turned Chapter 7 turned little house of horrors in Fitchburg, Massachusetts. As it turned out, the “scariest” part of the HCW case involved multiple attorney sanctions for Rule 9011 violations spread over 4 years.
Jack Hoover filed his Chapter 11 case in March of 2014. He had operated “Halloween Costume World” since 1989 and at its then-present location of 480 Water Street, Fitchburg, Mass. since 2000. Although he operated HCW as a year-round business, its peak season occurred, not surprisingly, in September and October. Jack cited the 2008 recession, irregular cash flow, unpaid sales taxes, and struggles with his business mortgage creditors (including Bank of America) as causing his 2011 Chapter 13 case, his 2012 Chapter 13 case, and his 2014 Chapter 11 case. Third time’s a charm when navigating the debt limitations for Chapter 13.
Jack scheduled assets of $875,629 and liabilities of $1,295,680. His assets included the HCW location (scheduled at $454,00), a $425.00 1988 Lincoln Town Car Stretch Limo (Halloween Model), and, of course, $141,634 worth of “Halloween Inventory.” Click here for HCW’s prior attempt at an auction (with photos). His liabilities included $130,581 in back sales taxes, $113,000 in deficiency debts, and over $60,000 in trade debt to various Halloween-themed vendors. Other than providing the background for this blog post, Jack’s July 28, 2014 Chapter 11 plan proposal must have fallen short because the Court converted his Chapter 11 case to a Chapter 7 case on July 31, 2014.
On September 8, 2014, with the Halloween season just getting started, the Trustee moved for authority under § 363 to conduct an auction of HCW’s assets on October 1, 2014. With Court authorization, auctioneer Aaron Posnik & Co., Inc. got to work.
For Fitchburg (population 40,318), it was a newsworthy auction. Specifically, the local Telegram & Gazette did a nice little hometown write-up. To quote the story:
Among the items sold at the auction was a lot of 25,000 rental costumes, limited edition Star Wars items, large props including an industrial sized electrical panel that could easily be part of Frankenstein’s laboratory, a pipe organ, life-sized animated horror characters, collectible items like a large collection of Kennedy memorabilia, dismembered bodies, mannequins, store fixtures, cash registers and two giant spiders that buyers would need a large wall to hang. The creep factor was especially high in items for sale later in the day. One lot included only dismembered body parts.
The auction grossed $200,244 on $143,634 in fixtures and inventory. Click here for the Auction Catalog (with item by item photos). The Court approved an auction fee of $14,008 and expenses of $17,066–the costs doubled when the auctioneer realized on the second visit that HCW also had six trailers and two inner warehouse rooms full of stuff. Ooops. Anyway, the Auction Report is also worth a click.
As an aside, the case became and continues to be rather litigious and hard-fought. Not only were there stay violations alleged against Bank of America by Hoover (that turned out to be frivolous and sanctions-worthy), but Hoover also sought emergency relief in April of 2016 to order Posnik & Co. to “remediate the deplorable condition in which [the auctioneer] left the property after the auction.” To paraphrase the auctioneer’s plausible response, (i) “Why’d you wait over a year and a half to seek ’emergency’ relief?” and (ii) “That place was an impossible dump long before we showed-up. Just look at it, Judge.” There are pictures. Was this the “before” or the “after”–hence the dispute.
In exchange for a full release, though, Posnik agreed to cart away the clothing and debris, be done with Jack Hoover forever, and have plenty of fun stories to tell at auctioneer cocktail parties for years to come. “Yeah, you wouldn’t believe it. I’m still having nightmares about the ‘Gollum Busts’ and the room full of child mannequins!”
Initial Attorney Sanctions
If an impossibly dysfunctional Halloween auction wasn’t enough, the HCW case also offers some “chilling” precedent for Rule 9011 sanctions. Specifically, the Court sanctioned Hoover’s Chapter 11 attorney, barely a week after converting the case, on account of the attorney’s “profoundly flawed” arguments in support of two pending matters.
First, the attorney filed a stay violation motion against Bank of America, alleging that Bank of America had willfully violated the stay when it initiated a foreclosure pre-petition for March 19, 2014, announced a postponement of the foreclosure sale to June 18, 2014 after the March 14, 2014 bankruptcy filing, and sought stay relief to foreclose on April 18, 2014. The Court concluded that the attorney violated Rule 9011 in advancing that argument because it was completely at odds with well-settled law in that district (i.e., a creditor violates the stay when it initiates foreclosure after the petition date, not when it postpones an already-initiated foreclosure).
To be sure, the Court’s primary problem with the attorney’s argument was that the Court perceived the attorney as having cited cases in support of his argument that stood for the “exact opposite” of his argument. Indeed, I was somewhat sympathetic with the argument until I got to that part of the sanctions order because representing to the public that a foreclosure will occur on a date certain before seeking, much less obtaining, stay relief seems fraught with § 362 risk for the creditor and its attorney. At a minimum, the Court’s reading of Rule 9011 provides a cautionary tale for the aggressive or creative litigators among us!
Second, the attorney, in opposition to the motion to convert/dismiss the case, argued that a debtor need only seek authority to use cash collateral in the case of consensual liens as opposed to Mass. Department of Revenue’s non-consensual sales tax liens. The attorney’s conduct in that regard was much more egregious because he very selectively “paraphrased” § 363(a) to limit, in “absurd” fashion, the definition of “cash collateral” to cash on account of consensual liens. You know you’re in trouble when the Court is quoting the definition of “paraphrasing” from The Shorter Oxford English Dictionary (5th. ed.) to skewer your bad faith effort to trick the Court on an obvious point of law!
To satisfy my minimum quota for corny Halloween references, the Court’s “treat” for the offending attorney, who had already been sanctioned twice in 2010 by another bankruptcy judge for asserting defenses that were “completely unsupported by fact or law,” was as follows (and affirmed by the First Circuit in 2016):
[The attorney] is hereby sanctioned as follows. He shall enroll in and attend in person (not on-line) a one semester, minimum three credit-hour class on legal ethics or professional responsibility in an ABA accredited law school to be completed within 13 months of this order. Upon completion of the course [the attorney] shall file a certificate of compliance in this case. If a certificate of compliance is not filed by September 30, 2015, further proceedings will be initiated.
The attorney appealed to the District Court and lost and then appealed to the First Circuit and lost again. What followed really is a “house of horrors.”
With the appeal concluded and matter transferred to the Chief Judge, the Court scheduled a status conference for July 26, 2016. On July 24, the attorney filed a status report, indicating that he did not graduate from an ABA-accredited law school and that all of the ABA schools in Boston had no enrollment or audit options for non-graduates. Thus, he proposed that he attend an MCLE professionalism course required for newly-admitted lawyers.
Unfortunately, that wasn’t enough for the Court. Instead, the Court ordered the attorney to try again at the ABA schools by submitting the Court’s 2014 sanctions order and the First Circuit’s opinion upholding that order. The Court ordered him to, on or before August 30, 2016, register to audit the course at an ABA school or document his unsuccessful efforts in an affidavit for the Court.
On August 26, 2016, the attorney reported via affidavit that he was auditing “Law and the Ethics of Lawyering” at New England Law – Boston. Thus, the Court cancelled the status conference. On September 29, 2017, the Court scheduled another status conference for November 2, 2017. In response, the attorney filed correspondence from the law school confirming that his course began on August 21, 2017 and would end on December 19, 2017. Thus, it appears that the attorney didn’t actually start the course until a year after his 2016 status report. With that, the Court ordered the attorney to report back to the Court within two weeks after receiving his final grade.
On January 18, 2018, the attorney reported back, explaining that the law school informed him that, because he was only auditing the class, he would not be taking the final exam. Additionally, because he had missed a number of classes due to hospitalization from an accident, he and the law school had agreed that he would re-enroll in the class in the Fall of 2018 when the course was offered in the evenings. He reported that, “thus far, this sanction has cost me about $12,000 in tuition, plus the cost of transportation (since I am still confined to a wheelchair and cannot drive).”
In response, the Court ordered him to show cause on January 31, 2018 for why additional sanctions shouldn’t be imposed for his failure to comply with the 2014 sanctions order.
That hearing did not go well at all. Specifically, the Court entered an order on January 31, 2018 holding that the attorney had failed to comply with his original order within 13 months and had “unilaterally and without leave . . . self-limited” the Court’s original order by limiting it to ethics courses offered only at night. Thus, the Court further sanctioned the attorney by ordering him to pay to the Clerk of Court $10,000 on or before September 4, 2018; provided, however, that if the attorney certified on or before August 31, 2018 that he had complied fully with the original order, then the Clerk would release the $10,000 sanction back to him. The Court emphasized that $10,000 was not an arbitrary figure because, while the prior Court had fined him $1,000, that sanction was apparently not a sufficient motivator. Thus, perhaps $10,000 would do the trick.
Finally, on August 31, 2018, the attorney paid the $10,000 to the Clerk. Two months later, and after the September 4 deadline, there’s still no indication that the attorney has attended the class and complied with the Court’s original order from 2014.
I enjoyed the Halloween auction part. My kids will, too. The sanctions part, not so much. The sanctions order was bad enough. The four year saga that followed, and is continuing, was even worse. This all goes to show that (i) Rule 9011 is real, (ii) appealing Rule 9011 sanctions except in the most extraordinary of circumstances is probably not a good idea unless you simply want to magnify the pain, expense, and publicity of it all, and (iii) once a sanction is going to stick, you should move heaven and earth to comply quickly, and move-on. With that, we wish you all a Happy Halloween!