In re Summit Financial Inc.
In re Summit Financial Inc., ___BR___ (Bankr. C.D. Cal. Nov. 5, 2021, bankruptcy case number 21-12276): Bankruptcy Court (Bankruptcy Judge Scott Clarkson) held it is improper for debtor’s attorney to put a “Disclaimer” on Debtor’s bankruptcy Schedules and Statement of Financial Affairs, because the “Disclaimer” contravened the debtor’s statutory obligation to update its schedules and statement of affairs.
Judge Clarkson ruled that a debtor and debtor’s attorney cannot disclaim responsibilities that the bankruptcy debtor (and the bankruptcy debtor’s attorney) owe pursuant to the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (here the debtor’s statutory obligation to update its schedules and statement of affairs.)
The attorney had copied and used, a disclaimer used in a Subchapter V case, which had been used in several of the country’s largest “mega” cases.
Judge Clarkson laid down guidelines for a lawyer who copies pleadings written by another lawyer in a different case. The debtor in Judge Clarkson’s court was a collection of seven nail salons dealing with unpaid rent. The case “is not General Motors,” remarked Judge Clarkson in his decision. The debtor had prefaced the 34-page schedules and statement of affairs with 11 pages of disclaimers and explanations. Judge Clarkson held that a debtor cannot put a disclaimer on the debtor’s schedules and statement of financial affairs which says that:
- The debtor has no duty to ensure that the schedules and statement of affairs are accurate;
- The debtor has no duty to update or correct the schedules and statement of affairs; and
- Even if the debtor makes changes in the schedules or statement of affairs, the debtor has no duty to tell any creditor that changes were made, even creditors affected by the changes.
Judge Clarkson said he was “quite concerned” about the disclaimers. He cited Ninth Circuit authority for the proposition that the disclaimer contradicted the “universal understandings that bankruptcy schedules and statements of financial affairs require continuous monitoring and updating when necessary, and that the Federal Rules of Bankruptcy Procedure require notice of all amendments to affected parties in interest.” Judge Clarkson entered an order directing the debtor to show cause why it should not be removed as debtor in possession or why the case should not be dismissed. The impending hearing prompted the debtor’s counsel to remove the offending disclaimers.
In explanation, the debtor’s counsel said that the disclaimers were “somewhat boilerplate” and had been taken from four of the country’s recent and largest chapter 11 cases. The deletion of the disclaimers allowed Judge Clarkson to vacate the hearing to remove the DIP or dismiss. However, he said that “this matter will be revisited at the time of professional compensation review.” Subchapter V, he said, “was meant to reduce the costs of Chapter 11 to small businesses, not bilk the small businesses and their creditors with mega case billing opportunities.”
Not finished, Judge Clarkson went on to discuss whether cutting and pasting legal documents from pleadings by other lawyers in other cases amounts to plagiarism or has ethical implications. Citing an article by two law professors about ethics and plagiarism, Judge Clarkson laid down guidelines for lawyers to follow when copying someone else’s work. “[F]or goodness sake,” he said, “make sure that your own facts match up with the facts present from the original source,” and “make sure that the law is correct and hasn’t changed since the original text was written.”
Comment of attorney Kathleen P. March of The Bankruptcy Law Firm, PC: Lesson this decision teaches is do NOT use disclaimers, and do NOT mindlessly copy disclaimers (or other material) used in other cases, before analyzing to make sure what you are copying is correct.