An upstate bankruptcy lawyer who makes his living holding creditors’ feet to the fire for procedural violations has drawn the ire of a federal judge who suggested the attorney lured a bank into a trap in order to collect a fee.
Northern District Bankruptcy Judge Margaret Cangilos-Ruiz (See Profile) scolded attorney James Selbach of Liverpool in In re Beth M. Squire, 13-62070, on March 26. She said, “this court will not reward tactics intent upon generating anticipated attorneys’ fees.”
Selbach filed a notice of appeal on Tuesday.
The dispute centers on fee-shifting provisions of the bankruptcy code. Under the code, when a debtor files for relief, an “automatic stay” instantly halts any collection efforts. A creditor that violates the stay can be forced to pay damages to the debtor, plus legal fees and costs.
Selbach has developed a specialty practice in which he litigates alleged violations of the automatic stay and discharge provisions.
According to a footnote in the decision, Selbach last year filed 43 motions in the Northern District alleging violations of the automatic stay or other provisions of the code, and another 22 in the first quarter of 2014.
“Over the last six or seven years, I have probably filed hundreds and settled hundreds,” Selbach said in an interview. “So what? They are either violations or they are not. That is exactly what Congress intended when it established the fee shifting statute.”
But Cangilos-Ruiz, who noted that she “admonished Mr. Selbach in the past to exercise a fair amount of discretion and good judgment in bringing motions for violations before the court,” said the attorney has a responsibility to mitigate rather than exacerbate violations.
Squire involves a school teacher who filed a Chapter 7 bankruptcy petition on Dec. 31, 2013. At the time, the debtor had an unsecured loan with Berkshire Bank which she was paying off with automatic monthly withdraws from her account with Citizens Bank. The money was withdrawn by the Automated Clearing House (ACH) network on the 30th day of each month and forwarded to Berkshire.
Berkshire received notice of the bankruptcy filing on Jan. 3, 2014. About two weeks later, Berkshire called Selbach to see if his client wanted the ACH payments to continue.
But Selbach never returned the call, and on Jan. 30 ACH attempted to transfer $199.53 from the debtor’s Citizens Bank account to Berkshire. The collection effort violated the automatic stay, even though the Citizens Bank account was overdrawn and no money was actually transferred, and Selbach submitted what the court described as a “boilerplate” motion for damages and fees.
Cangilos-Ruiz found that Berkshire did indeed violate the automatic stay and ordered the creditor to refund the $35 service fee charged to the debtor. She also awarded Selbach $137.50 for a half hour’s worth of his legal work and $27 in fees.
The judge said Berkshire, well aware of the bankruptcy petition, should have curtailed the automated payments. But she also said that while Selbach did not have an affirmative obligation to shield Berkshire from making an error, “it would, in this court’s opinion, have been better practice for counsel to have returned the phone call and nipped in the bud the events which followed.”
“When presented with a clear opportunity to intervene and preclude aggravation and potential emotional distress to one’s client, good advocacy suggests that counsel intervene,” Cangilos-Ruiz wrote. “[The bankruptcy code] was not designed to encourage a debtor or her counsel to lay in wait until a violation occurs and then pounce upon the creditor.”
Cangilos-Ruiz found it ironic that Selbach often contends that until he files a sanctions motion, some creditors tend to ignore the automatic stay.
“[G]iven counsel’s frequent refrain that it takes a sanctions motion to get a creditor’s attention, there is an irony not lost on the court that when, in the present instance, this creditor reached out to get debtor-counsel’s attention, the response came by motion alleging a violation,” she wrote.
Selbach, of the Selbach Law Firm, has appealed to the district court. He said the decision relied on unsworn statements and supposition.
“I am seeking to have an erroneous ruling of law undone,” Selbach said. “I was not allowed to present evidence. I was not allowed to engage in discovery. I was not allowed an evidentiary hearing. It was disposed of from the bench without any evidence, on the implication that somehow the debtor had set up the creditor for the violation. We want discovery on whether that really happened.”
Selbach said Congress, through the fee-shifting provision, obviously intended to establish an incentive to challenge creditors that violate the automatic stay.
“It is to encourage lawyers to take these cases,” Selbach said. “That is the whole point of it. Most of our cases are referred from other bankruptcy attorneys, and when we get a referral our firm does its due diligence to find out … if there is a violation. There are lots of cases that [Cangilos-Ruiz] never sees that we reject. But when there is a violation, there is a statutory provision to enforce the debtor’s rights.”
Louis Levine of Melvin & Melvin in Syracuse, counsel for Berkshire Bank, noted that the scheduled automatic withdrawal never occurred because the Citizens Bank account was overdrawn.
“Jim [Selbach] has sort of a cottage industry of making motions for stay violations, and he has some cases which are better and some cases which are not so good, and I think this was a case which was not so good,” Levine said. “Other lawyers in town often refer sanction cases to him because he has something of a specialty in it. This was not one of his better cases.”
Mary Lannon Fangio of Whitelaw & Fangio in Syracuse appeared for the U.S. Trustee. She declined comment.