Bankr. E.D.N.C.: In re Sugar- Discharge Allowed After Reliance on Counsel Mitigates Sanctions

Summary

Judge Warren’s most recent opinion in In re Sugar (Bankr. E.D.N.C. Aug. 15, 2025) follows remand from both the U.S. District Court and the Fourth Circuit Court of Appeals. The case began with the dismissal of Christine Sugar’s Chapter 13 in 2023, coupled with a five-year nationwide bar on refiling, after she sold her residence without prior court approval in violation of E.D.N.C. Local Bankruptcy Rule 4002-1(g)(4).

At the time, the court viewed Sugar as defiant and unapologetic, making dismissal with prejudice appear justified. On appeal, however, the District Court and the Fourth Circuit (in Sugar v. Burnett, 130 F.4th 358 (4th Cir. 2025)) questioned whether reliance on advice of counsel had been adequately considered. The Fourth Circuit remanded with instructions to reassess sanctions in light of her attorney’s role.

On remand, represented by new counsel, Sugar testified credibly that she had repeatedly disclosed her inheritance and contemplated sale of her house to her attorney, but was affirmatively advised she could keep and use the funds and that no court approval was needed to sell her home. The court found this advice “poor and erroneous,” and concluded Sugar reasonably relied on it. Vacating its prior order, the bankruptcy court allowed her discharge to enter and invited the Bankruptcy Administrator to review possible professional discipline.

Commentary

This decision continues the long-running saga of Sugar, now spanning multiple layers of appellate review. At each turn—from dismissal, to sanctions, to affirmation by the District Court, to remand by the Fourth Circuit, and finally to discharge—her case highlights the tension between local rule compliance, debtor candor, and attorney responsibility.

The Fourth Circuit’s intervention is notable. Unlike its earlier refusal to extend grace to the debtor in Purdy (where a debtor’s repeated bad faith filings justified dismissal with prejudice), here the appellate court recognized that attorney advice could mitigate even seemingly blatant violations. Similarly, while In re Beasley,  Case No. 21-02322-5PWM, involved sanctioning an attorney for nondisclosure, in Sugar the focus shifted to how that nondisclosure misled both the debtor and the court.

The contrast is instructive:

• Purdy underscores that when the debtor alone is culpable, harsh remedies like multi-year bars may be sustained.

• Beasley demonstrates that courts will not hesitate to sanction attorneys who conceal material information.

• Sugar sits uncomfortably between these poles, reminding us that when an attorney’s “crusade” or misinterpretation of local rules leads a debtor astray, punishment of the debtor herself may be inequitable.

For consumer debtor attorneys, the case is a cautionary tale with two utilities:

1. Reliance on counsel is not an absolute defense, but if documented through emails and testimony, it can mitigate sanctions and even reverse a dismissal years later.

2. Local Rule compliance is not optional. Even if a practitioner believes a rule is inconsistent with the Code, pursuing a test case requires full and frank disclosure to the client of the risks—especially the possibility of dismissal with prejudice.

The Sugar opinions (bankruptcy, district, and circuit) now join Purdy and Beasley as part of the small but growing body of Fourth Circuit consumer bankruptcy case law emphasizing professional responsibility. While debtors may ultimately receive a second chance, attorneys who misadvise or conceal face not only sanctions but potential referral to the State Bar.

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