By John Caher
New York Lawyer
New York Law Journal
February 10, 2005

ALBANY - Sanctions and attorney's fees imposed on a lawyer for "willful and malicious" conduct are not dischargeable in bankruptcy, a federal judge has found.

Northern District Judge Lawrence E. Kahn, in Ball v. A.O. Smith, 1:04-CV-532, also held that the automatic stay in the U.S. Bankruptcy Code will not shield an attorney from a disciplinary action.

The appeal from Bankruptcy Court involves an attorney, James Jay Ball, and centers on a series of disputes between the attorney and an adversary throughout a proceeding in Louisiana. Court records show that Mr. Ball, of Meridale, N.Y., represented a plaintiff who alleged fraud in connection with his purchase of a used silo manufactured by A.O. Smith Corp.

After the fraud case was dismissed with prejudice in 2001, A.O. Smith moved for sanctions, accusing Mr. Ball of commencing a frivolous action with no purpose other than to harass the defendant and cause it to incur expenses.

U.S. District Judge Tucker L. Melancon of Louisiana imposed sanctions on Mr. Ball and his decision was affirmed on appeal to the U.S. Court of Appeals for the Fifth Circuit.

Mr. Ball then attempted to discharge the sanctions in bankruptcy, arguing that they were based on conduct judicially deemed "unreasonable" but not necessarily malicious. Under the Bankruptcy Code, fines and other sanctions imposed for willful and malicious conduct cannot be discharged.

Chief Northern District Bankruptcy Judge Stephen Gerling refused to discharge the debt in Mr. Ball's Chapter 7 bankruptcy, leading to the appeal before Judge Kahn. Judge Kahn agreed with the bankruptcy court.

"All attorneys must act reasonably when operating within the confines of our judicial system, and the statements of Judge Melancon certainly demonstrate that Debtor did not," Judge Kahn wrote. "While Judge Melancon did not state on the record that Debtor's actions were 'willful and malicious,' that is inherent based on the imposition of sanctions."

The court did not conclude that all judicially imposed sanctions under Rule 11 of the Federal Rules of Civil Procedure indicate "willful and malicious" conduct, which would unilaterally exempt them from bankruptcy discharge.

Rather, Judge Kahn said the facts of this case and the comments of Judge Melancon indicate that the trial court did indeed find Mr. Ball's conduct willful and malicious.

Mr. Ball also attempted to use the automatic stay to prevent A.O. Smith from recovering attorney's fees and from causing his pro hac vice admission in North Carolina to be revoked.

Records show that A.O. Smith filed an action in the Eastern District of New York on March 26, 2002, to recover $5,184 in attorney's fees associated with a canceled deposition of Mr. Ball that was scheduled to take place on Feb. 13, 2002 —— the same day Mr. Ball filed for bankruptcy protection. The deposition was supposed to have occurred in Halifax County, N.C.

Judge Gerling found that since Mr. Ball's pro hac vice admission was not granted until March 25, 2002, the proceeding commenced by A.O. Smith could not have been commenced pre-petition. Therefore, he said, the automatic stay provides no relief.

Judge Kahn said that despite a continuing dispute over precisely when Mr. Ball sought and was granted pro hac vice admission in North Carolina, there was no violation of the automatic stay because the matter "falls squarely within the purview of the government regulatory exemption to the automatic stay."

Mr. Ball appeared pro se. Jeffrey A. Eyres and Frederick W. Morris of Leonard, Street and Deinard in Minneapolis represented A.O. Smith.