This article originally appeared in the March 2025 edition of MortgagePoint magazine, online now.
Can a State Court enter Rule 11 sanctions against a debtor who has filed a bankruptcy petition and is otherwise protected by the automatic bankruptcy stay?
The Washington Court of Appeals answered in the affirmative in the published case of Nguyen v. Quality Loan Service Corp. 562 P.3d 384. The facts of the case are all too familiar. Nguyen defaulted on her mortgage, and her mortgage servicer initiated nonjudicial foreclosure proceedings via the trustee, Quality Loan Service Corp. Nguyen then sued both the mortgage servicer and the trustee, alleging, amongst other things, that they violated the Consumer Protection Act of Washington, slandered title, and intentionally inflicted emotional distress. Two days after filing her lawsuit, in an effort to avoid the Trustee’s Sale proceeding, Nguyen filed her bankruptcy petition, which automatically stayed the Trustee’s Sale and all legal proceedings against her.
Quality Loan Service Corp. filed a motion to dismiss, arguing that Nguyen had filed a similar lawsuit, which was dismissed with prejudice. Quality warned Nguyen three times before pursuing its motion to dismiss that Nguyen’s lawsuit was frivolous and that it would seek sanctions under CR 11 unless she voluntarily dismissed her complaint. Nguyen refused, and Quality proceeded with its motion for dismissal arguing that CR 11 sanctions were necessary to ensure Nguyen would not bring the same lawsuit for a third time. Quality’s motion was granted, and Quality then moved for an award of attorneys’ fees as a sanction pursuant to CR 11. That motion was granted as well, and Nguyen appealed, arguing that the imposition of a sanction violated the automatic stay.
The appellate court recognized that a bankruptcy petition generally operates as a stay of legal proceedings against the debtor under 11 U.S.C. § 362(a)(1).
However, there is an exception for “the commencement or continuation of an action or proceeding by a governmental unit … to enforce such governmental unit’s police and regulatory powers. 11 U.S.C. § 362(b)(4).” In finding that this exception applied, the Washington court was the first court to do so.
It is never an easy decision to move for sanctions. Often just the suggestion of doing so can ignite the emotions of a party or attorney and frustrate any reasonable attempt to resolve the matter.
However, there are times when said pursuit is justified and appropriate. At least now that pursuit will not be hindered by a party filing for bankruptcy protection, at least in the state of Washington.
