Case No. 10-12596, Adv. No. 10-00179.
In re: Jonathan H. Horsfall, Chapter 7, Debtor. First
Weber Group, Inc., Plaintiff, v. Jonathan H. Horsfall, Defendant.
MEMORANDUM DECISION
ROBERT
D. MARTIN, Bankruptcy Judge.
After
a trial on April 13, 2011 ,
I held that the debt owed to the plaintiff ("First Weber") was
discharged. First Weber has appealed, and that appeal is pending. On May 14, 2011 , the defendant filed a
motion for sanctions under Bankruptcy Rule 9011(b). In turn, First Weber filed
a Motion for Sanctions on May 31, 2011 .
A hearing was held August 24, 2011
to consider both sanctions motions.
The
facts of the underlying dispute are set out in my Memorandum Decision, First
Weber Group, Inc. v. Jonathan H. Horsfall, Case No. 10-00179 (April 26,
2011). While they provide useful background, they are not the basis of the
present motions.
Throughout
the trial. Attorney Moermond, counsel for First Weber,1
asked redundant questions that were objected to as irrelevant. Nearly all the
objections were sustained. Mr. Moermond was given numerous directives to limit
the scope of his questions to the issue at trial, which he consistently failed
to heed. He doggedly repeated his irrelevant questions. He frequently rolled
his eyes. Though not fully audible, nor recorded, he made constant sotto vocc comments
(some vulgar) during the trial, which were heard by court staff and visitors to
the courtroom. Attorney Moermond's conduct was rude, petulant, immature and
disrespectful.
In
its Motion for Sanctions under Bankruptcy Rule 9011, the defendant argues that
the plaintiff fded its complaint for an improper purpose. The defendant
contends that the allegation in the complaint that Jonathan H. Horsfall
willfully and maliciously injured plaintiff "was without any evidentiary
support whatsoever," and that the claim of nondischargeability was not
warranted by law.
First
Weber argues that the defendant's sanctions motion should be denied because it
does not describe the specific conduct that allegedly violates Bankruptcy Rule
9011, and the motion itself is therefore baseless and frivolous. First Weber
also moves for sanctions under Bankruptcy Rule 9011(b)(4), alleging that the
defendant made and failed to amend repeated unwarranted denials in its Answer.
First Weber contends that the denials were made despite clearly documented
facts in the underlying record or in the defendant's own statements. First
Weber's attorney emailed the defendant's attorney on December 13, 2010 to inform the defendant of the
unwarranted denials of "numerous facts and documents which your client
has, or which were found as facts, and which are in the State Court's file in
the underlying Dane County
At
the hearing on the motions for sanctions, I noted that although I had never had
a more unpleasant day in court than the day this trial was held, the truculent
conduct on the part of Attorney Moermond does not necessarily give rise to Rule
11 sanctions. That rule addresses some, but not all, offensive conduct.
In
a brief tiled after the sanctions hearing, the defendant pointed to the
appellant brief that First Weber filed in the district court to argue that
First Weber acknowledged it would not have received full commission had the
deal originally closed. The defendant argues that First Weber therefore had no
true economic motive for this litigation because First Weber received
approximately the economic value of the transaction as a distribution from the
bankruptcy estate in payment of its claim. The defendant further argues that
since there was no true economic motive for this litigation, it must have been
filed for an improper purpose — to harass and intimidate the defendant by forcing
him to engage in expensive litigation. First Weber responded that the original
deal did not close because the defendant left First Weber, so the defendant's
hypothetical argument is irrelevant. First Weber contends that it commenced
this adversary proceeding because it believes it is entitled to relief by
virtue of the state court judgment, and therefore, the bankruptcy court
litigation was not pursued for an improper purpose.
A. Defendant's Motion for Sanctions
An
attorney is subject to sanctions under Bankruptcy Rule 9011(b)2
when he submits a petition, pleading, written motion or other paper to the
court that falls into one of four categories:
(1) the document was submitted for an improper purpose
(i.e., to harass one's adversary or to delay or drive up the costs of
litigation); (2) the claims contained in the document are frivolous because
they lack support under existing law; (3) the allegations contained in the
document lack evidentiary support or are unlikely to have evidentiary support
upon further investigation; or (4) the denials in the document are unwarranted
based on the evidence. Fed. R. Bankr. P. 901 l(b)(l)-(4); see also Fed. R. Civ.
P. ll(b)(l)-(4).
A
motion for sanctions under Rule 9011 must "describe the specific conduct
alleged to violate subdivision (b)." Fed. R. Bankr. P. 9011(c)(1)(A); see
also Fed. R. Civ. P. 11(c)(2). However, on its own initiative, the court
may enter an order describing the specific conduct that appears to violate
subdivision (b) and directing an attorney, law firm, or party to show cause why
it has not violated subdivision (b) with respect thereto. Fed. R. Bankr. P.
9011(c)(1)(B); see also Fed. R. Civ. P. 11(c)(3).
Once
a court determines that a person violated Bankruptcy Rule 9011(b), it may
impose an "appropriate sanction," The appropriateness of a sanction
is judged by "what is sufficient to deter repetition of such conduct or
comparable conduct by others similarly situated." Fed. R. Bankr. P.
9011(c)(2). The rule itself provides for a variety of options, including"
directives of a nonmonetary nature, an order to pay a penalty into court, or,
if imposed on motion and warranted for effective deterrence, an order directing
payment to the movant of some or all of the reasonable attorneys' fees and
other expenses incurred as a direct result of the violation." Id.
A
motion for sanctions under Bankruptcy Rule 9011 is subject to a 21-day safe
harbor provision. Busson-Sokolik v. Milwaukee
Turning
to the relevant substantive requirements of the rule, under Bankruptcy Rule
9011 (b)(1), the "improper purpose" prong, "the court's focus
should be on what the party intended, and on what the party knew or should have
known — both factually and legally — on the day the document was filed." In
re Snyder, 2011 Bankr. LEXIS 630, *2 (Bankr. E.D. Wis.
Feb. 11,2011 ). When
determining whether the claim was supported in law or in fact, the proper
inquiry is not whether the claim itself was frivolous, but whether the
plaintiff conducted an adequate inquiry into the facts and the law before he
filed the claim. Matter of Excello Press, Inc., 967 F.2d 1109, 1112
(7th Cir. 1992) (citing Mars Steel Corp. v. Continental Bank, N.A., 880 F.2d 928, 932 (7th
Cir.1989)).
The
purpose of the sanctions remedy under Bankruptcy Rule 9011 is to discourage
unnecessary filings, prevent the assertion of frivolous pleadings, and require
good faith filings. In re Firnhaber, 2004 WL 2211686, *3 (Bkrtcy. S.D.
Ill. 2004) (not reported) (citing Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073. 1077
(7th Cir. 1987), cert, dismissed, 485 U.S. 901 (1988)). The rule is
not intended to function as a fee shifting statute which would require the
losing party to pay costs. Id. Id. Id.
While
no court within the Seventh Circuit has imposed Rule 11 or Rule 9011 sanctions
for reasons of an attorney's courtroom behavior, courts within this circuit
have found this a basis for Rule 37 sanctions. Rule 37 requires attorneys to
cooperate and make appropriate disclosures during discovery. Courts may dismiss
cases under Rule 37 "when there is a clear record of delay or contumacious
conduct, or when other less drastic sanctions have proven unavailing." Powers
v. Chicago Cir. Ill. Connecticut
to Illinois . Reyiblatt v.Illinois
Inst of Tech., 1999 U.S. Dist. LEXIS 4073, 7-8 (N.D. Ill. Mar. 19, 1999).
The district court found that the attorney's "obdurate refusal to accede
to this court's rulings is an inappropriate and unacceptable way for a litigant
to act in a federal court." Id. Id. Id. Id.
Rule
11 motions are intended to "deter unnecessary filings, prevent the
assertion of frivolous pleadings, and require good faith filings," In
re Firnhaber, 2004 WL 2211686 at 3. In this case, the defendant does offer
some evidence to establish that First Weber commenced this action for an
improper purpose. But that evidence is scant, and a creditor's reasons for
seeking to have a debt declared non-dischargeable in bankruptcy are generally
self-evident. The defendant provides little evidence that First Weber filed the
adversary proceeding without an adequate inquiry into the facts and the law.
Though the defendant argues that First Weber's alleged lack of economic motive
can only mean that the original complaint was fded for an improper purpose, no
authority supports this reason alone as a basis for Rule 11 sanctions. The
defendant's oral argument and subsequently fded brief also fail to point to
specific evidence of fding for an improper purpose. First Weber's case was
weak, but that in itself is not enough to establish an improper purpose on the
part of First Weber. Therefore, Rule 9011 sanctions are not appropriate.
Still,
one could infer that First Weber did not do an adequate inquiry into the facts
to support a "willful and malicious" injury under § 523(a)(6) before
it commenced its adversary proceeding. Based on Attorney Moermond's Original
Complaint and appellant brief, it appears that First Weber believed it would
prevail on its motion for summary judgment based on the circuit court judgment
that found the defendant liable for tortious interference with contract. The
Original Complaint states § 523(a)(6) as a cause of action for
nondischargcability, and it appears to rely heavily on the circuit court judgment
as a basis for willful and malicious injury. Had Attorney Moermond done a more
thorough search into the underlying law, it may have been clear that the case
for willful and malicious injury was very weak. This inference may support the
conclusion that First Weber did not adequately inquire whether it had a basis
in law in fact before it initiated the adversary proceeding, but it also in
part refutes the defendant's argument that the complaint was filed simply to
harass the defendant. First Weber believed that it would prevail on its motion
for summary judgment. Because these are tenuous inferences, the tacts as they
stand do not support that the pleadings were frivolous or filed for an improper
purpose.
Finally,
Attorney Moermond's conduct at trial may have been truculent and disrespectful
and his competence in the courtroom inadequate, but this does not rise to the
level of inappropriateness that would warrant sanctions. His conduct was of the
sort that is usually censured by social mores and discouraged by public (or
private) embarrassment, not by legal sanctions. It is remarkable that neither
he nor his client (a firm seemingly dependent on favorable public image) were
not sufficiently self-controlled nor embarrassed enough to modify the shameful
performance. Unlike the Rule 37 case described above, Attorney Moermond was not
yelling at the court and blatantly disobeying direct orders from the court. His
inappropriate behavior, while reprehensible, is not enough to trigger Rule 9011
sanctions.
B. First Weber's Motion for Sanctions
In
its motion, First Weber first argues that the defendant's motion for sanctions
should be denied because it does not describe the specific conduct that
allegedly violates Bankruptcy Rule 9011, and the motion is therefore baseless
and frivolous. A bankruptcy court can impose sanctions when a party files a
frivolous motion for sanctions. In re Hasek, 1997 WL 1050829, 7 (N.D. III .
1997) (not reported) (citing In re Express America, Inc., 132 B.R. 542 (Bankr.
W.D. Pa. 1991)). In In re Hasek, Judge Ginsberg found grounds for
sanctions because, "despite the requirements of Rule 9011, [the party]
made no inquiry into the reasonableness of his actions and advanced no credible
evidence or argument in support of his motion for sanctions against [the
nonmovant]." Id.
First
Weber also seeks sanctions, alleging that the defendant made and failed to
amend repeated unwarranted denials in its Answer. Under Bankruptcy Rule 9011,
when a party files a pleading, it is certifying to the court that "the
denials of factual contentions are warranted on the evidence or, if
specifically so identified, are reasonably based on a lack of information or belief."
Fed. R. Bankr. P. 9011(b)(4). Case law addressing Rule 9011(b)(4) motions is
limited. In this case, First Weber notified the defendant's attorney of the
alleged unwarranted denials in the defendant's Answer on December 13, 2010 . (Moermond Aff, Doc. 56-2, at
16.) Attorney Moermond informed the defendant's attorney that the denial of
certain facts in the Answer were found as facts by the State Court or that the
defendant acknowledged as facts, and it does not appear that the defendant's
responded to these deficiencies. Id.
While
post-judgment motions for sanctions are allowed in the Seventh Circuit, they
still must comply with the procedural requirements. The defendant's
post-judgment motion for sanctions was appropriate because the defendant claims
the whole case was filed for an improper purpose. The court of appeals has
found that in circumstances where "the lack of evidentiary support for
defendant's counterclaim could not have been determined until trial was
completed," the interest in deterring further frivolous post-judgment
motions by the same litigants or in deterring future litigants may be promoted
by a post-judgment request for sanctions. Divane v. Krull Elec. Ctt, 200 F.3d 1020, 1025
(7th Cir. Ill.
C. Other Bases for Sanctions
I. Authority under 11 U.S.C. § 105, 28 U.S.C. § 1927
11
U.S.C. § 105 gives bankruptcy courts the power to "issue any order,
process, or judgment that is necessary or appropriate to carry out the
provisions of this title." Under § 105, a bankruptcy court may take
"any action or [make] any determination necessary or appropriate to
enforce or implement court orders or rules, or to prevent an abuse of
process." While the court's power under this statute is broad, a sanctioning
court must exercise caution when invoking this power, and should ordinarily
rely on available authority conferred by statutes and procedural rules if the
available sources of authority would be adequate. Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123 (1991).
28
U.S.C. § 1927 provides that "any attorney or other person admitted to
conduct cases in any court of the United States or any Territory thereof who so
multiplies the proceedings in any case unreasonably and vexatiously may be
required by the court to satisfy personally the excess costs, expenses, and
attorneys' fees reasonably incurred because of such conduct." Courts are
split on whether bankruptcy courts have authority to impose sanctions under §
1927. See In re Jazz Photo Corp., 312 B.R. 524, 541 &
n.26 (Bankr. D. N.I 2004). The authority to issue sanctions is not a core
proceeding under § 157, but courts may issue sanctions related to matters that
are core proceedings. See Volpert v. Ellis, (In re Volperi), 177 B.R. 81, 89 (Bankr.
N.D. Ill. 1995).
The
Seventh Circuit Court of Appeals tentatively supports a bankruptcy court's
imposition of § 1927 sanctions. In 1985, the court of appeals affirmed this
court's decision to impose fees under § 1927. In re TCI
Ltd., 769 F.2d
441 (7th Cir. 1985). Judge Easter brook noted that "Judge Martin had
the authority to award the fees incurred right from the beginning." In
re TCI , Ltd., 769 F.2d at
448. However, in affirming this decision, the court of appeals did not discuss
whether § 1927 applies to bankruptcy courts. Matter of Volpert, 110 F.3d 494, 497 (7th
Cir. 1997). In Volpert v. Ellis, Judge Schmetterer held that a
bankruptcy court as a judicial officer of the district court may impose § 1927
sanctions as to a matter within its core or related jurisdiction. Volpert v.
Ellis, (In re Volpert), 177 B.R. 81, 88-89
(Bankr. N.D. Ill. 1995). On
appeal, the district court took the view that bankruptcy courts are not
"court[s] of the United States" under 28 U.S.C. § 151, but
nevertheless held that bankruptcy courts are empowered as a unit of the
district court to impose sanctions under § 1927. Matter of Volpert, 110
F.3d at 496.
The
Seventh Circuit Court of Appeals declined to explicitly affirm the imposition
of sanctions under § 1927. Id. United States
or any Territory thereof." Id. Id. Id. Id.
The
United States Supreme Court's recent holding in Stern v. Marshall
curtailed bankruptcy court jurisdiction, and may move circuit courts in the
direction of allowing bankruptcy courts to issue orders only in matters that
are clearly core. Stem v. Marshall, 131 S.Ct. 2594, 2601
(2011). The implications of this decision remain to be determined by the
Seventh Circuit courts.
While
the Stern decision may have had an impact on the way courts interpret a
bankruptcy court's authority to issue sanctions under § 1927, the holding does
not directly affect the issues in this case. Unlike § 157(b)(2)(C), § 1927
arguably does not "confer Article III
power on a bankruptcy court" because it only references "courts of
the United States," which, depending on the interpretation, may not
include bankruptcy courts. The question is whether bankruptcy courts have
erroneously exercised authority to sanction attorneys when § 1927 arguably does
not allow them to do so. This issue has not come before the Seventh Circuit
Court of Appeals post-Stem, and the law in the Seventh Circuit as it currently
stands is that bankruptcy courts may impose § 1927 sanctions through its
authority under § 105. Therefore, if § 1927 sanctions are warranted, this court
may impose them.
2. Application
Attorneys
may be sanctioned under § 1927 if they unreasonably and vexatiously multiply
proceedings in any case. 28 U.S.C. § 1927. This statute permits a party to
recoup fees and costs when an attorney acts in an objectively unreasonable
manner and with either subjective or objective bad faith. Kotsilieris v.
Chalmers, 966
F.2d 1181, 1184 (7th Cir. 1992); Alexander v. United States, 121 F.3d 312, 316 (7th
Cir. 1997) (holding that sanctions are also appropriate when objectively
unreasonable litigation-multiplying conduct continues despite a warning to
desist.); see, e.g., Ordower v. Feldman, 826 F.2d 1569, 1574
(7th Cir.1987) (indicating that intentional ill will or reckless conduct
constitutes vexatious conduct).
While
§ 1927 sanctions are penal in nature and should be construed strictly,
sanctions may be warranted when counsel displays laxity in prosecuting the
adversary proceeding or drags out the pleadings process, "thus causing
more expensive litigation, and obstructed discovery." In re Kitchin, 327 B.R. 337, 368-69
(Bankr. N.D. Ill. 2005). The
principle underlying § 1927 is that in a system requiring each party to bear
its own costs and fees, courts must ensure that each party really does bear the
costs and does not foist expenses off on its adversaries. Id. TCI
Lid., 769 F.2d
441 (7th Cir. 1985)). When a party recklessly creates needless costs, the
other side is entitled to relief. Id,
In
Volpert, the appellant repeatedly filed untimely responsive proceedings
and repeatedly failed to give notice of pleadings to opposing counsel. Id. Id. Id. Id. Id.
In
this case, Attorney Moermond unreasonably prolonged the trial by repeatedly
asking irrelevant questions despite the Federal Rules of Evidence and the
court's directives. This caused countless objections and delays throughout the
trial. However, prolonging a trial is not the same as vexatiously multiplying
proceedings, and therefore, this alone does not warrant sanctions under § 1927.
Attorney Moremund also questioned the court's ruling on the objections, and
argued after being told to move on to another question. He also made many sotto
voce comments and behaved in a disrespectful manner. This conduct may
constitute "contempt for the law, the court, and opposing counsel."
Given his unprofessional conduct and flagrant disregard for the Federal Rules
of Evidence, there may be a basis to impose § 1927 sanctions. However, in the
aggregate, his conduct does not fall squarely within the type that § 1927 is
trying to prevent. Weighing the circumstances as a whole, sanctions are not
appropriate in this case.
While
the conduct in this case does not warrant sanctions, the attorneys must be
reminded to observe the Seventh Circuit's Standards for Professional Conduct.3
Two predominant standards outlined by the Seventh Circuit Court of Appeals are
as follows:
Lawyers' Duties to Other Counsel
1. We will practice our profession with a continuing
awareness that our role is to advance the legitimate interests of our clients.
In our dealings with others we will not reflect the ill feelings of our
clients. We will treat all other counsel, parties, and witnesses in a civil and
courteous manner, not only in court, but also in all other written and oral
communications. Lawyers' Duties to the Court 1. We will speak and write civilly
and respectfully in all communications with the court.
The
attorneys here should further be reminded of the Preamble to the Standards for
Professional Conduct: that conduct "should be characterized at all times
by personal courtesy and professional integrity in the fullest sense of those
terms." Lawyers should refrain from conduct that is "uncivil, abrasive,
abusive, hostile, or obstructive," as any conduct of this type tends to
"delay and often deny justice." The Court of Appeals for the Seventh
Circuit expects judges and lawyers to make a mutual and firm commitment to
these standards, which encourage us to meet our obligations to each other, to
litigants and to the system of justice, and thereby achieve the twin goals of
civility and professionalism, both of which are hallmarks of a learned
profession dedicated to public service.
For
the reasons outlined above, both motions for sanctions are DENIED. It will be
so ordered.
FootNotes
1. Mr. Moermond appears to be general counsel or in-house counsel for First Weber, and as such, an employee of First Weber.
2. The language of Federal Rule of Civil Procedure 11 is
virtually identical to Rule 9011. In re Victoria U.S. Dist.
LEXIS 20803 (E.D. Wis. June 9, 1993).
3. Standards for Professional Conduct Within the Seventh
Federal Judicial Circuit available at: http://www.ca7.uscourts.gov/rules/rules.htm.
