SLG Client Alert: Bad Case for Debt Collector Servicers: You can be Liable for Sanctions Along with Your Attorney

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From: Spencer Scheer
Date: April 5, 2022
To: All SLG Clients and Affiliates:
Subject: Bad Case for Debt Collector Servicers: You can be Liable for Sanctions Along with Your Attorney. What you Should Do to Protect Yourself.

This following is a bad case for both creditor counsel and their clients. This particular judge is well known for unilaterally taking action to punish creditors that he perceives are overreaching or flaunting the bankruptcy automatic stay and/or discharge injunction. The underlying facts were that the creditor proceeded on a wage garnishment in violation of automatic stay (11 USC §362) and discharge injunction (11 USC §524).

This is what the judge held in the case of In re LeGrand (Bankr. E.D. Cal., Mar. 29, 2022, No. 19-21198-C-7) 2022 WL 962316, at *1 :

“The question is what must a nationwide servicer of defaulted credit accounts show to dodge “represented party” liability for Rule 9011(b) violations committed by its local collection law firm? The answer is: establish, implement, and police an effective program of supervision of local counsel. After awarding stay violation damages for postpetition wage garnishments (In re LeGrand, 612 B.R. 604 (Bankr. E.D. Cal. 2020)), there remained the problem of factually and legally frivolous briefs and arguments and whether corrective measures should extend to the client of the offending local counsel.

What is also worth noting is that the judge issued sanctions on his own initiative.

The Moral of the Story:

 If you are a creditor and don’t want to be on the hook for stay or discharge violations actions taken by your counsel, or at least want to be able to assert that you did not participate in such unlawful actions, you should have and implement written policies governing what actions cannot or should not be taken by counsel. Then, you should monitor what your counsel is doing

Spencer Scheer