Opinion
CASE NO. 00-71661, ADVERSARY NO. 03-9119.
February 12, 2004
On November 11, 2003, Coastal Care Resources, L.L.C., the reorganized Debtor in this Chapter 11 case, and The GMS Group, LLC, the proponent of the confirmed plan of reorganization, filed a motion in the above Chapter 11 case and an almost identical motion in adversary proceeding no. 03-9119 for orders pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure imposing sanctions against Steven L. Dye. In the main Chapter 11 case, the motion seeks sanctions in the amount of attorney's fees and expenses incurred in defending against Mr. Dye's Motion for Relief from Judgment (document no. 554) and in bringing the motion for sanctions. In the adversary proceeding, the motion seeks sanctions in the amount of attorney's fees and expenses incurred in defending against Dye's motion for reconsideration of the judgment dismissing that proceeding (document no. 9) and in bringing the motion for sanctions. The Court held an evidentiary hearing on the motions on January 29, 2004. In addition to hearing testimony, the Court, without objection, took judicial notice of all of the pleadings and proceedings held in this case, including the adversary proceedings. The Court makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure made applicable by Bankruptcy Rule 7052.
There is no doubt that Steven L. Dye has made a nuisance of himself in filing frivolous pleadings in this Chapter 11 case and associated adversary proceedings. In orders entered in the main case and in adversary proceeding no. 03-9288, the Court granted similar motions filed by U.S. Bank and entered money judgments against Mr. Dye. The Court is unable to do so with respect to the present motions because movants failed to follow the correct procedure.
Rule 9011(c) of the Federal Rules of Bankruptcy Procedure provides in relevant part:
(c) Sanctions.
If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.
(1) How Initiated.
(A) By Motion. A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 7004. The motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b). If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorney's fees incurred in presenting or opposing the motion. Absent exceptional circumstances, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees.
Movants and their counsel ought to be familiar with this portion of Rule 9011. In an order entered on October 17, 2003 (document no. 567), the Court denied an earlier motion filed by movants because they had failed to follow the procedure in Bankruptcy Rule 9011(c)(1).
Surprisingly, movants' attorneys have repeated their error. At the January 29, 2004 hearing, movants introduced no evidence to show that they had served Mr. Dye with a copy of their motions for sanctions at least 21 days before filing them with the Court. Movants introduced copies of a letter dated May 16, 2003, addressed not to Dye but to his counsel, demanding that the complaint be withdrawn and a copy of a letter dated September 14, 2004 addressed to Dye demanding that the motion for relief from judgment be withdrawn, but these letters did not comply with Rule 9011(c)(1).
Rule 9011(c)(1), like its counterpart in Fed.R.Civ.P. 11, is known as the "safe harbor" provision. A party or attorney who withdraws or amends a pleading that would otherwise violate Rule 11 or Bankruptcy Rule 9011 during the 21-day waiting period thereby avoids being sanctioned. This procedure promotes the economic disposition of disputes based upon allegations that a pleading lacks a factual or legal basis or was filed for an improper purpose. Even if a pleading is not withdrawn, the rule usually enables the parties to bring their dispute into sharper focus, thereby saving the court time.
"The safe-harbor provision is a mandatory procedural prerequisite and sanctions imposed without compliance are improper." In re Soriaga, 2001 WL 837918 (Bankr. N.D. Ill. 2001). Accord: In re Smith, 230 B.R. 437 (Bankr. N.D. Fl. 1999). "Motions made without compliance will not be heard, and sanctions resulting from such motions are subject to reversal." 10 Collier on Bankruptcy ¶ 9011.06[1][b] (15th ed. rev. 2001).
In Barber v. Miller, 146 F.3d 707 (9th Cir. 1998), the Court of Appeals reversed a district court's award of sanctions under Fed.R.Civ.P. 11, which is virtually identical to Bankruptcy Rule 9011, because the moving party had failed to give the required notice. The Ninth Circuit found that the trial court had abused its discretion, notwithstanding the Court's observation that the claim asserted by the respondent "was not `warranted by existing law or by a nonfrivolous argument for the extension, modification or reversal of existing law[,]' See Fed.R.Civ.P. 11(b)(2)[,]" and "that [movant] gave [respondent] repeated notice of that deficiency." Id. at 710. As noted by the Ninth Circuit, other circuits have reached the same conclusion. See Elliott v. Tilton, 64 F.3d 213, 216 (5th Cir. 1995); Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1328 (2d Cir. 1995). Coastal Care and GMS are not entitled to sanctions against Mr. Dye under Bankruptcy Rule 9011, even though sanctions would have been warranted, because they did not give Dye the proper notice.
Movants also contend that the Court should impose sanctions against Mr. Dye pursuant to section 105(a) of the Bankruptcy Code or pursuant to the Court's inherent power. In support of this position, Movants cite several cases on pages 8 and 9 of their Memorandum of Law submitted with the motions, but their cursory descriptions of the holdings of those cases fail to capture the distinctions between those cases and this one.
For the proposition that a court may "sanction frivolous or vexatious litigation under section 105(a) or through its inherent, equitable powers," movants cite Jove Engineering, Inc. v. I.R.S. (In re Jove Engineering, Inc.), 92 F.3d 1539 (11th Cir. 1996), a case that they incorrectly indicated had been decided by the Eighth Circuit. Memorandum of Law, document no. 572, p. 8.
In that case, the Internal Revenue Service violated the automatic stay imposed by section 362(a) of the Bankruptcy Code by repeatedly demanding payment of pre-petition debt and threatening to seize the debtor's property, in spite of extensive communications sent to the I.R.S. by the debtor's attorney pointing out that the debtor had filed bankruptcy. The debtor, a corporation, moved for an order holding the I.R.S. in contempt for violating the automatic stay and seeking attorney's fees pursuant to sections 362(h) and 105(a) of the Bankruptcy. Section 105(a) of the Bankruptcy Code permits a court "to issue any order . . . that is necessary or appropriate to carrying out the provisions of this title." Section 362(h) of the Bankruptcy Code is the only section specifically providing for damages for violations of the automatic stay, but that subsection applies only to individual debtors.
The bankruptcy judge was unsure about his power to entertain such a motion, and ultimately, the district court withdrew the reference. The district court held an evidentiary hearing and concluded that section 362(h) had no applicability because the debtor was not an individual, that the violation of the stay was inadvertent, and that the court would not hold the I.R.S. in contempt but would award $500 in attorney's fees pursuant to section 105(a). The debtor appealed.
The Court of Appeals held that the district court correctly denied the debtor's request for non-compensatory coercive damages but that it abused its discretion in not holding the I.R.S. in contempt for the stay violation, which the Court of Appeals found to be willful. The Court agreed that section 362(h) was inapplicable. Although the Court discussed the use of a court's inherent power to sanction contempt, it did not suggest that course to the district court but instead held that section 105(a) provided the necessary authority to impose sanctions on the I.R.S. for its willful violation of the automatic stay.
Jove Engineering was not about frivolous or vexatious litigation, as movants stated, nor did the case involve Rule 9011. The Court of Appeals determined that section 105(a) permitted the district court to impose a monetary sanction for contempt arising from a willful violation of the automatic stay. The Court stated that "[t]here is nothing in the Bankruptcy Code to indicate that, compared to other remedies, monetary relief under § 105 is particularly not `necessary or appropriate.' Indeed, it is clear that monetary relief is `necessary or appropriate' for certain violations of the automatic stay." Id. at 1554.
In the present case, an order pursuant to section 105(a) sanctioning Mr. Dye for filing the two documents identified in the motions and awarding damages to movants is not necessary or appropriate to carry out the provisions of the Bankruptcy Code because Bankruptcy Rule 9011 provided a complete remedy for dealing with Mr. Dye's conduct insofar as movants' pocket books are concerned.
Movants cite In re Volpert, 110 F.3d 494 (7th Cir. 1997) and Bessette v. Avco Financial Services, Inc., 230 F.3d 439 (1st Cir. 2000), cert. denied 532 U.S. 1048, 121 S.Ct. 2015, 1489 L.Ed2d 1018 (2001) for the proposition that "it is well established that sanctions may be awarded under section 105(a) to punish unreasonable and vexatious litigation." Memorandum of Law, document no. 572, p. 8. The holdings in those cases are also inapplicable to the present case.
The person sanctioned in Volpert was Volpert's lawyer, Ellis. The bankruptcy court granted a creditor's motion to sanction Ellis under 28 U.S.C. § 1927, and the district court affirmed. "The bankruptcy court ruled that Mr. Ellis' delays in filing Volpert's answer, the legal insufficiency of the answer that was filed, and Mr. Ellis' repeated failure to serve opposing counsel with proper notice demonstrated conduct that unreasonably and vexatiously multiplied the bankruptcy court's proceedings." Id. at 496. Thus, in Volpert, the sanctionable conduct, like the conduct of the I.R.S. in the Jove Engineering case, was outside the purview of Bankruptcy Rule 9011. The Court of Appeals held that the bankruptcy court lacked authority to impose sanctions under 28 U.S.C. § 1927. Nonetheless, it affirmed the judgment, finding that the bankruptcy court had the power under section 105(a) of the Bankruptcy Code to award monetary sanctions against Ellis and in favor of a creditor because Ellis had abused the judicial process. The Court of Appeals pointed out that no other statute or procedural rule adequately dealt with Ellis' misconduct.
In the Bessette case, Bessette sued Avco in the U.S. district court seeking sanctions for violations of the discharge injunction imposed by section 524 of the Bankruptcy Code. Bessette contended that Avco had improperly pressured her to reaffirm a discharged debt pursuant to a reaffirmation agreement that it did not file with the bankruptcy court. Section 524 contains no provision explicitly permitting a bankruptcy court to award damages to a debtor for violation of that injunction, and the district court ruled in favor of Avco. The Court of Appeals reversed, holding that the district court, sitting as a bankruptcy court, had the power under section 105(a) to award a monetary sanction against Avco in favor of the debtor.
Here, by contrast, Bankruptcy Rule 9011 provided Coastal Carc and GMS with an adequate remedy. If a court could award sanctions under Section 105(a) under the circumstances here, the effect would be to write the safe harbor provision out of Bankruptcy Rule 9011(c)(1). To do so would be an abuse of this Court's discretion, assuming it has any under the circumstances.
Movants cite Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) for the proposition that "[a] court's inherent powers can be invoked even if procedural rules exist which sanction the same conduct." The facts of that case cabin the use of inherent power, however. Chambers had engaged in vexatious conduct that transcended Rule 11. Not only had he filed numerous frivolous pleadings in his effort to renege on a deal to sell a television station, but he also attempted to transfer to a trust for the benefit of his family, property that the district court ultimately determined he had agreed to sell to the plaintiff. He violated at least one injunctive order, and after losing a portion of the litigation concerning whether certain equipment was included in the sale, he removed that equipment from the station. Following a frivolous appeal near the end of the case, the Court of Appeals for the Fifth Circuit remanded with instructions to determine the amount of the sanctions for taking the appeal and "to determine whether further sanctions should be imposed for the manner in which the litigation had been conducted." Id. at 40.
On remand, the plaintiff moved for sanctions under Rule 11, 28 U.S.C. § 1927 and the district court's inherent power. The district court imposed sanctions equal to the amount of attorney's fees incurred by plaintiff, a sum of almost one million dollars, based on the conduct of Chambers throughout the case. The Court of Appeals affirmed. In his appeal to the Supreme Court, Chambers asserted that the district court erred by not confining itself to considering sanctions under section 1927 and the applicable procedural rules. The Supreme Court affirmed, holding,
. . . when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power. But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power.
Like the Court of Appeals, we find no abuse of discretion in resorting to the inherent power in the circumstances of this case. It is true that the District Court could have employed Rule 11 to sanction Chambers for filing "false and frivolous pleadings," [ NASCO, Inc. v. Calcasieu Television Radio, Inc.] 124 F.R.D., at 138, and that some of the other conduct might have been reached through other Rules. Much of the bad-faith conduct by Chambers, however, was beyond the reach of the Rules; his entire course of conduct throughout the lawsuit evidenced bad faith and an attempt to perpetrate a fraud on the court, and the conduct sanctionable under the Rules was intertwined within conduct that only the inherent power could address.
501 U.S. at 50 (emphasis added). Thus, in Chambers, the subject matter of the sanctions hearing and motion was the conduct of Chambers in the entire case, including conduct that Rule 11 did not cover.
In the present case, Coastal Care and GMS discussed a few of the motions filed by Dye that the Court denied, but the motion for sanctions concerns only the Motion for Relief from Judgment (document no. 554) in the main case and the motion for reconsideration of the judgment dismissing that adversary proceeding no. 03-9119 (document no. 9). The attorney's fees sought were only those incurred in responding to those motions and in filing the motions for sanctions.
In Chambers, the Supreme Court observed that ". . . whereas each of the other mechanisms [statutes and rules] reaches only certain individuals or conduct, the inherent power extends to a full range of litigation abuses. At the very least, the inherent power must continue to exist to fill the interstices." Id. at 46. Bankruptcy Rule 9011 left no interstices with regard to Dye's conduct in filing the two pleadings about which movants complain. As it must and should, this Court follows the command of the Supreme Court to "rely on the Rules rather than the inherent power" because Bankruptcy Rule 9011 provided an adequate remedy for Dye's conduct targeted in the motions for sanctions.
For these reasons, it is
ORDERED that the motions of Coastal Care Resources, L.L.C. and The GMS Group, LLC for sanctions against Stephen L. Dye for filing his motion for relief from judgment filed in the main bankruptcy case (document no. 572) and for filing his motion for reconsideration of the judgment dismissing adversary proceeding no. 03-9119 (document no. 13) are DENIED.