In Re: Schaefer Salt ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
9-9-2008
In Re: Schaefer Salt
Precedential or Non-Precedential: Precedential
Docket No. 06-4574
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-4574
IN RE: SCHAEFER SALT RECOVERY, INC.,
Debtor
CAROL SEGAL,
Appellant
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civil No. 05-cv-05484)
District Judge: The Honorable Katharine S. Hayden
Argued: June 25, 2008
Before: SLOVITER, BARRY and ROTH, Circuit Judges
(Opinion Filed: September 9, 2008)
Stephen V. Falanga, Esq. (Argued)
Connell Foley
85 Livingston Avenue
Roseland, NJ 07068-0000
Counsel for Appellant
Nicholas Khoudary, Esq. (Argued)
700 Route 18
East Brunswick, NJ 08816-0000
Counsel for Appellees
OPINION OF THE COURT
BARRY, Circuit Judge
A distinguished judge of the United States Bankruptcy
Court for the District of New Jersey found that petitions filed
seriatim under Chapter 11 and Chapter 7 of the Bankruptcy Code,
and quickly dismissed, were filed in bad faith in a blatant abuse of
the Bankruptcy Code and the Bankruptcy Court. Refusing to
allow the Court “to be used as a litigation tool,” sanctions were
imposed under 28 U.S.C. § 1927 on a finding that the
“reprehensible” conduct of counsel fell well within that statute by
having multiplied the proceedings unreasonably and vexatiously.
We will shortly turn our attention to the specific conduct
which led to the imposition of sanctions, and simply note at this
juncture that any suggestion that sanctions were not warranted or
should not have been awarded would be absurd. The question
before us, however, is not as simple as whether sanctions were in
order; rather, the question before us is this: did the Bankruptcy
Court err when it reversed itself after it came to believe that we
would invalidate the award under our “Pensiero supervisory
rule”—and more about that later —because the motion seeking
sanctions was not filed until after the entry of final judgment.
Although convinced that sanctions were warranted, the
Bankruptcy Court “regretfully” vacated the award, and the District
Court affirmed.
We have not in a precedential opinion addressed certain of
the issues the Bankruptcy Court and the District Court so
thoughtfully addressed. Because we have not done so, it is not
surprising that those Courts did not accurately predict what we
would do. We will vacate the order of the District Court and
remand for further proceedings.
I.
On May 12, 2004, a mere eight days after it was formally
2
incorporated as a business entity, appellee Schaefer Salt Recovery,
Inc. (“SSR”) filed a bare bones petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
District of New Jersey. SSR’s only assets were mortgages on
three properties as to which tax lien foreclosure actions brought by
appellant Carol Segal (“Segal”) were pending in the Superior
Court of New Jersey. SSR’s Vice President and counsel, appellee
Nicholas Khoudary (“Khoudary”), advised Segal’s counsel that
the foreclosure actions were stayed as a result of the filing and
concomitantly filed Notices of Bankruptcy Filing in Segal’s
foreclosure actions. Presumably the automatic stay was one of the
reasons why Khoudary advised Segal’s counsel that “Segal was
skunked.” (A.111.)
On June 10, 2004, Segal moved to dismiss the Chapter 11
petition for cause pursuant to 11 U.S.C. §§ 1112(b) and 105(a),
arguing that the petition had been filed for the sole purpose of
frustrating Segal’s efforts to conclude the pending foreclosure
actions. By order dated July 6, 2004, the Bankruptcy Court
granted the motion, dismissing the petition on a finding that it had
been filed in bad faith, but striking language in the proposed order
that would have barred SSR from filing another petition for one
hundred and eighty days.
Following the dismissal, the foreclosure actions were
reinstated in the Superior Court. On August 13, 2004, in response
to what Segal describes as “this latest stalling tactic,” (Br. at 8),
the Superior Court granted Segal’s motion to strike SSR’s
answers, finding that they set forth no genuine issue of material
fact and no legally sufficient defense, and ordered the foreclosure
actions to go forward as uncontested matters. That same day, SSR
filed a new petition in the Bankruptcy Court, this time pursuant to
Chapter 7, for no apparent reason other than to cause the
automatic stay to again kick in.
On August 7, 2004, Segal filed a motion to dismiss the
Chapter 7 petition for cause pursuant to 11 U.S.C. §§ 707(a) and
105(a). In support of his motion for a short return date, Segal
argued that SSR had no creditors and no assets other than the
purported mortgages, and that this latest filing was nothing more
than a transparent litigation strategy to delay the foreclosure
actions then scheduled to take place in three days.
3
A hearing date was set for August 24, 2004. On that date,
Khoudary advised the Bankruptcy Court that SSR consented to the
dismissal of the Chapter 7 petition and that he saw no need to
appear. The Court placed its ruling on the record in the presence
of Segal’s counsel.
[We] received some calls from Mr. Khoudary
indicating that he would voluntarily dismiss the
bankruptcy proceeding due to his health and so on,
that he couldn’t be here. Now I have no problem
accepting that offer, with this proviso in light of the
dismissal of the case by the Court . . . [not] quite
eight weeks ago[.]
[I]n light of the timing of the most recent filing, I
am going to do a court order which dismisses the
case and imposes [a] 180 day bar on the filing of
any petition under any chapter of the Bankruptcy
Code. I found the last filing to be a bad faith filing.
I warned the parties and indeed I indicated I
expected that knowing the Court’s position . . . Mr.
Khoudary well knew the law [and] would not be so
foolish as to file a case that did not meet the
requirements of a good faith filing despite – and so
I struck the 180 day bar order language in the prior
order while the old adage, fool me once, shame on
you, fool me twice, shame on me, is that to be put
into effect here. I’ll take a voluntary dismissal, I’ll
reflect that in my order that I’m imposing [a] 180
day bar order. I will not allow this bankruptcy court
to be used as a litigation tool by a party who in truth
has not so much a reorganizational intent, but
intends to use the bankruptcy court as an offensive
weapon. That kind of use, frankly, offends not only
the Court but the Bankruptcy Code.
(A.42-43.) The Court promptly entered an order granting the
motion to dismiss, noting that SSR “consents to dismissal,” and
prohibiting SSR from filing another petition under the Bankruptcy
Code for one hundred and eighty days. (A.145-46.)
Nine days later, on September 2, 2004, Segal moved under
4
Rule 9011 of the Federal Rules of Bankruptcy Procedure and the
Court’s inherent power for costs and attorneys’ fees against SSR
and Khoudary for filing successive, frivolous bankruptcy
petitions. On September 27, 2004, the Court heard argument, and
concluded that although it had “some question as to whether
[Rule] 9011 applie[d] . . .” given that “the matter is already
adjudicated,” (A.51), that did not end the matter.
[W]hat frustrates me about this case is on its face, in
my view, both the 11 filing and most particularly
the 7 filing were, in fact, abuse of the bankruptcy
process.
Bankruptcy – use of bankruptcy petition is a
proper defensive weapon both for a debtor to
preserve an asset and to insure payment to creditors.
It’s not an offensive weapon, and in both instances
that’s what Schaefer Salt Recovery did. Let us not
forget that Schaefer Salt Recovery was rapidly
created to hold this mortgage, filed the first 11
without the benefit of counsel, notwithstanding it’s
a corporation, and indeed filed this second filing.
It’s not clear to me whether you, Mr. Khoudary, was
[sic] acting as the counsel for your own corporation
or not, but it strikes me that this falls well within the
purview of the statute dealing with vexatious
litigation where the filings are designed and do, in
fact, unreasonably multiply litigation that has
resulted not only in the consumption of Bankruptcy
Court resources but a back and forth in the State
Court.
(A.51-52.) The Court, therefore, awarded attorneys’ fees and
costs against Khoudary under 28 U.S.C. § 1927, but only for the
“unnecessary return trip to Bankruptcy Court in the context of the
Chapter 7” because the Court did not believe that the statute
would cover the earlier filing. (A.52.) The Court directed counsel
for Segal to submit a certification of fees and costs, and counsel
did so, but the certification inexplicably fell through the cracks
and an order granting sanctions in a specific amount was not
entered.
5
By opinion and order dated August 24, 2005, the
Bankruptcy Court reversed the award of sanctions, having
determined, after further review, that the request for sanctions was
first made after the entry of final judgment and thus was untimely
under the supervisory rule we adopted in Mary Ann Pensiero, Inc.
v. Lingle, 847 F.2d 90 (3d Cir. 1988), for violations of Rule 11 of
the Federal Rules of Civil Procedure. The Bankruptcy Court,
relying on a not-precedential opinion of this Court which held that
the Pensiero supervisory rule applies to bankruptcy court
proceedings even where a de minimis period of time had elapsed
after final judgment, found that the supervisory rule was a bright
line rule from which deviation—here, nine days after final
judgment, i.e., the second dismissal—is not appropriate.1 The
Bankruptcy Court concluded that it “would be reasonable to
expect” us to view sanctions under § 1927 in the same manner as
we viewed Rule 11 sanctions and sanctions under a court’s
inherent power.
Segal moved for reconsideration, a motion the Bankruptcy
Court “regretfully” denied. The Court explained:
[B]elieve me, Schaefer Salt and the attorney, Mr.
Khoudary richly deserved a sanction, the problem
is, the timing with which it was done . . . I wasn’t
thinking, frankly, when I awarded sanctions as to
whether I was within the scope of my authority to
do so, because frankly I was so aggravated at the
blatant, blatant misuse of the bankruptcy code, that
I didn’t think about the fact that as I put it before,
that I don’t have this unlimited equity wand.
....
1
Piscitelli v. Mirow (In re Nicola), 65 Fed. Appx. 759,
762-63 (3d Cir. 2003). We do not regard that opinion as
precedent that binds us and will not cite it as authority. Third
Circuit Internal Operating Procedure 5.7. It follows, therefore,
that we reject appellees’ argument that that case “controls” the
issue of whether the supervisory rule applies to proceedings in the
bankruptcy court. (Appellees’ Br. at 19.)
6
. . . [I]t was not a voluntary dismissal. The
matter came on in front of me on a shorten time
motion to dismiss brought by your client. The
hearing that I held was based on the motion by your
client. Perhaps – I can’t even imagine what led Mr.
Khoudary to finally in his skirmishing, file this
letter voluntarily withdrawing the Schaefer Salt
bankruptcy. It doesn’t matter what he was thinking.
The Court held a hearing on the motion of Mr.
Siegel [sic], the Court issued an order based on Mr.
Siegel’s [sic] motion. That’s the Court order . . .
I’m not free to ignore . . . Third Circuit case law.
Believe me, I would like to ignore it. I find,
frankly, the conduct and I’m looking directly at Mr.
Khoudary to be unprofessional and particularly
inappropriate for someone who is not unfamiliar
with bankruptcy practice. At a minimum, I think
probably a couple of RPCs were violated, which I
probably should have noted for the appropriate
parties, but in light of the Third Circuit’s
supervisory rule, I can’t issue the sanctions. I wish
I could.
(A.58-59.)
Segal appealed both the denial of the motion for sanctions
and the denial of the motion for reconsideration to the District
Court. The District Court concluded that although we had not yet
extended the supervisory rule to sanctions under Bankruptcy Rule
9011 or 28 U.S.C. § 1927, it saw no reason why Rule 9011 and §
1927 sanctions should be treated differently than sanctions under
Rule 11 and a court’s inherent power. Accordingly, the District
Court affirmed the orders of the Bankruptcy Court, carefully
explaining why.2
2
The District Court, as had the Bankruptcy Court before
it, rejected Segal’s argument that the Chapter 7 petition had been
voluntarily dismissed, finding, instead, that Segal’s motion to
dismiss had been granted and that, therefore, application of the
supervisory rule was required. It appears that, rightly or wrongly,
the Bankruptcy Court believed that with a voluntary dismissal of
7
We applaud the careful consideration given this case by the
Bankruptcy Court and the District Court, and turn to the issues
before us. In determining whether the District Court erred in its
disposition of Segal’s appeal from the Bankruptcy Court, we
review the Bankruptcy Court’s orders applying the standard it was
appropriate for the District Court to apply. See Universal
Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102 (3d Cir.
1981). Because the Bankruptcy Court’s denial of sanctions and
denial of Segal’s motion for reconsideration were based on
statutory interpretation and legal analysis only, our review is
plenary.
II.
The purpose of Rule 11 is to deter litigation abuse that is
the result of a particular “pleading, written motion, or other paper”
and, thus, streamline litigation. In Pensiero, “concerned with the
appropriate time for the filing and disposition of [Fed. R. Civ. P.
11] motions,” we crafted a supervisory rule that “all motions
requesting Rule 11 sanctions [must] be filed in the district court
before the entry of a final judgment” where such motions arise out
of conduct that occurred prior to the final judgment. 847 F.2d at
98, 100. The district court had granted summary judgment to the
defendant and the case was on appeal. While the appeal was
pending, the defendant moved for sanctions against the plaintiff
under Rule 11, and the district court granted the motion. On
plaintiff’s appeal of the award of sanctions, we reversed,
concluding that, in the context of Rule 11 sanctions, a supervisory
rule was justified to eliminate piecemeal appeals and to deter
further violations of Rule 11 later in that proceeding. We have
since extended Pensiero to a district court’s sua sponte imposition
of sanctions, concluding that the court “should decide the issue
prior to or concurrent with its disposition of the case on the
merits,” Simmerman v. Corino, 27 F.3d 58, 60 (3d Cir. 1994), and
to sanctions awarded under a court’s inherent power, Prosser v.
the Chapter 7 petition, it would have been unable to enter an order
barring the filing of another petition for one hundred and eighty
days, a bar the Court was convinced was appropriate given the
facts. (A.46.)
8
Prosser, 186 F.3d 403, 406 (3d Cir. 1999).3 In Simmerman, the
sanction we invalidated was imposed three months after entry of
the final order; in Prosser, the sanction we invalidated was
imposed more than thirty months after the final order. Most
recently, albeit in dicta, we observed that “[a]n obvious corollary”
to requiring parties to file their Rule 11 motion prior to final
judgment and requiring district courts when imposing sanctions
sua sponte to do so prior to or contemporaneously with final
judgment “is that district courts must resolve any issues about
imposition of sanctions prior to, or contemporaneously with,
entering final judgment.” Gary v. Braddock Cemetery, 517 F.3d
195, 202 (3d Cir. 2008). In accordance with the Pensiero line of
cases, district courts and bankruptcy courts have been applying,
with some regularity, the supervisory rule to sanctions sought
under Rule 11, a court’s inherent power, and Bankruptcy Rule
9011, Rule 9011 being in most respects a twin of Rule 11 tweaked
for the bankruptcy setting.
We have not decided in a precedential opinion whether the
Pensiero supervisory rule applies to bankruptcy court proceedings.
That having been said, preventing piecemeal appeals and deterring
future abuse are, like Mom and apple pie, good things whatever
the court, and so it would seem, at least at first blush, that the
supervisory rule should apply to proceedings in the bankruptcy
court as well as to those in the district court. Certainly, district
courts and bankruptcy courts in the Third Circuit believe that to be
so. See, e.g., In re Tobacco Rd. Assocs., LP, No. 06-cv-2637,
2007 U.S. Dist. LEXIS 22990, at *96 & n.158 (E.D. Pa. Mar. 30,
2007) (applying supervisory rule to Bankruptcy Rule 9011 after
finding it likely that Third Circuit would do so); In re Brown, No.
97-5302, 1998 U.S. Dist. LEXIS 19188, at *10 n.2 (E.D. Pa. Dec.
3, 1998) (noting that Pensiero rule applies to Rule 9011 sanctions
as well as Rule 11 sanctions); Raymark Indus., Inc. v. Baron, No.
96-7625, 1997 U.S. Dist. LEXIS 8871, at *28 (E.D. Pa. June 23,
3
We note that “[g]enerally, a court’s inherent power
should be reserved for those cases in which the conduct of a party
or an attorney is egregious and no other basis for sanctions exists.”
Martin v. Brown, 63 F.3d 1252, 1265 (3d Cir. 1995). A finding of
bad faith is “usually” required. In re Prudential Ins. Co. America
Sales Practice Litig., 278 F.3d 175, 181 (3d Cir. 2002).
9
1997) (although Third Circuit has yet to rule on issue, rationale for
supervisory rule applied to Rule 11 sanctions is same for Rule
9011 sanctions); In re HSR Assocs., 162 B.R. 680, 683 (Bankr.
D.N.J. 1994) (motion for sanctions under Rule 9011 untimely
under Pensiero).
For the following reasons, we need not decide whether,
given the facts of this case, the supervisory rule applies to
sanctions sought in bankruptcy court under Rule 11, Bankruptcy
Rule 9011, or a court’s inherent power. It is well established, and
we recognized in Pensiero, that a district court, after the entry of
final judgment and the filing of a notice of appeal, retains the
power to adjudicate collateral matters such as sanctions under
Rule 11. Pensiero, 847 F.2d at 98. Indeed, citing Pensiero and as
relevant here, we have held that a district court has jurisdiction to
impose sanctions under Rule 11 even though the motion seeking
the sanctions was filed after the filing of a notice of voluntary
dismissal under Rule 41(a)(1)(i). Schering Corp. v. Vitarine
Pharm., Inc., 889 F.2d 490, 496 (3d Cir. 1989).
To hold that a district court has no power to order
sanctions after a voluntary dismissal is to
emasculate Rule 11 in those cases where wily
plaintiffs file baseless complaints, unnecessarily sap
the precious resources of their adversaries and the
courts, only to insulate themselves from sanctions
by promptly filing a notice of dismissal.
Id.; see also In re Bath and Kitchen Fixtures Antitrust Litig., No.
07-1520, 2008 U.S. App. LEXIS 15957, at *8 n.8 (3d Cir. July 28,
2008) (“A district court retains jurisdiction to decide ‘collateral’
issues—such as sanctions, costs, and attorneys’ fees—after a
plaintiff dismisses an action by notice.” (citing Cooter & Gell v.
Hartmax Corp., 496 U.S. 384, 396-98 (1990)).
In Schering, we did not even mention the supervisory rule
and the prudential reasons underlying that rule, much less did we
find that sanctions were barred even though the motion for
sanctions was filed almost one and one-half months after the filing
of the notice of dismissal. Presumably we did not find the
supervisory rule worthy of mention because where there is a
voluntary dismissal, there is no danger of piecemeal appeals and
10
no future conduct to deter, the predominant justifications for the
rule.
It is, thus, fair to say, given Schering, that even if the
supervisory rule were to apply to bankruptcy court proceedings, a
bankruptcy court would not run afoul of that rule if it were to
impose sanctions, at least under Rule 11, following, as here, a
voluntary dismissal of one or both of the underlying bankruptcy
petitions.4 Moreover, we have held, albeit before the 1993
amendments to Rule 11 and the 1997 amendments to Bankruptcy
Rule 9011, that Rule 9011 is the equivalent sanctions rule under
Title 11 to Rule 11. See Stuebben v. Gioioso (In re Gioioso), 979
F.2d 956, 960 (3d Cir. 1992); Landon v. Hunt, 977 F.2d 829, 833
n.3 (3d Cir. 1992). Rule 9011, it is clear, discourages in
bankruptcy proceedings the same conduct proscribed by Rule
11—signing or advocating to the court a paper that violates the
certification standard of the Rule—with the purpose of both Rules
being to deter baseless filings. Accordingly, there appears to be
no reason, at least with reference to a voluntary dismissal, to come
to a different conclusion under Rule 9011.
We have just referred to the 1993 amendments to Rule 11
and the 1997 amendments to Bankruptcy Rule 9011. The
revisions were substantial, particularly the addition of safe harbor
provisions which explicitly place greater restrictions on the
imposition of sanctions, including a significant change in the
timing of and decision on Rule 11 and Rule 9011 motions. Under
amended Rule 11 and amended Rule 9011, a party cannot file a
motion for sanctions or submit such a motion to the court if the
challenged paper, claim, defense, contention, or denial is
4
Under the circumstances of this case, we need not
distinguish between a plaintiff who voluntarily dismisses an action
pursuant to Fed. R. Civ. P. 41(a)(1)(i) and one who simply says,
as here, that he has voluntarily dismissed the action and the court
enters an order of dismissal. Indeed, we see no reason not to take
appellees at their word when they conceded four times in their
opposition to the motion for sanctions that the petition had been
voluntarily dismissed and/or withdrawn, and three times in their
opposition to the certification of fees and costs that the petition
had been voluntarily dismissed.
11
withdrawn or corrected within twenty-one days after service of the
motion on the offending party. Fed. R. Civ. P. 11(c)(2); Fed. R.
Bankr. P. 9011(c)(1). If the twenty-one day period is not
provided, the motion must be denied. The purpose of the safe
harbor is to give parties the opportunity to correct their errors,
with the practical effect being that “a party cannot delay serving
its Rule 11 motion”—or, we suggest, its Rule 9011
motion—“until conclusion of the case (or judicial rejection of the
offending contention).” Fed. R. Civ. P. 11 advisory committee’s
notes to 1993 amendments. We wonder, then, whether the
supervisory rule, which we adopted in 1988 “[t]o carry out the
objectives of expeditious disposition,” Pensiero, 847 F.2d at 100,
retains much if any viability following the 1993 and 1997
amendments to Rules 11 and 9011.5 As has been noted with
reference to Rule 11, “[t]his safe harbor has had the salutary effect
of reducing Rule 11 volume while at the same time accomplishing
the goal of the Rule—streamlining litigation by eliminating abuses
proscribed by the Rule. It has the merit of doing so without
burdening the court.” Gregory P. Joseph: Sanctions: The Federal
Law of Litigation Abuse § 2(A)(4), at 25-26 (4th ed. 2008).6
5
We recognize, as we wonder, that those of our cases to
which we have earlier referred—Simmerman, Prosser, and
Gary—were all decided after the 1993 amendments and Prosser
and Gary after the 1997 amendments, yet we did not discuss the
effect of the amendments on the supervisory rule.
6
Two bankruptcy courts in the Third Circuit, aware that
Bankruptcy Rule 9011 was amended in 1997 to add a twenty-one
day safe harbor period, indicated, understandably, some
uncertainty as to what to do with the supervisory rule in light of
the amendment. See Cochran v. Reath (In re Reath), No. 04-
49188/JHW, Adv. No. 06-1531, 2006 Bankr. LEXIS 4477, at *16-
*18 & n.6 (Bankr. D.N.J. Dec. 6, 2006) (concluding that “we do
not have compliance . . . with the safe harbor rule . . . [and thus]
cannot award sanctions under Rule 9011,” but noting that the
rationale for when, under Pensiero, Rule 11 motions must be
brought is the same as that for Rule 9011 motions); In re Jazz
Photo Corp., 312 B.R. 524, 534 (Bankr. D.N.J. 2004) (“Whether
a timely sanctions motion is required to preserve the twenty-one-
day safe harbor period or ‘to carry out the objectives of
12
And we wonder whether, at least in one important respect,
Bankruptcy Rule 9011 is really the equivalent sanctions rule to
Rule 11. Bankruptcy proceedings are unique, witness, for
example, the automatic stay. Under the Bankruptcy Code, the
filing of a petition for bankruptcy operates, with some exceptions,
as a stay of the commencement or continuation of certain judicial,
administrative, or other actions or proceedings against the debtor,
enforcement of judgments against a debtor or the property of the
estate, and other acts by creditors against debtors. 11 U.S.C. §
362(a). The purpose of the automatic stay is “to afford the debtor
a ‘breathing spell’ by halting the collection process. It enables the
debtor to attempt a repayment or reorganization plan with an aim
toward satisfying existing debt.” In re Siciliano, 13 F.3d 748, 750
(3d Cir. 1994). It also benefits creditors by preventing certain
creditors from acting unilaterally to obtain payment from the
debtor to the detriment of other creditors. Maritime Elec. Co., Inc.
v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991).
Congress addressed the serious consequences of the
automatic stay by adding an exception to the safe harbor provision
in the 1997 amendments to Bankruptcy Rule 9011 when the
offending “paper” is a petition for bankruptcy, something it did
not do in the amendments to Rule 11 in 1993.7 Fed. R. Bankr. P.
9011(c)(1)(A). This, of course, renders meritless appellees’
argument that because the Chapter 7 petition was voluntarily
dismissed within the twenty-one day safe harbor period of Rule
9011, Segal received the relief he had demanded and could not,
therefore, seek sanctions. Congress explained the reason for the
bankruptcy petition exception:
expeditious disposition,’ the filing of a sanctions motion after
entry of final judgment is procedurally defective.” (quoting
Pensiero, 847 F.2d at 100) (emphasis in original)).
7
Indeed, the only “exception” in Rule 11, as amended, is
seen in subdivision (d), which clarified that Rule 11 is
inapplicable to any aspect of discovery because Rules 26(g) and
37 of the Federal Rules of Civil Procedure are specifically
designed for the discovery process and should cover the field,
rather than the more general provisions of Rule 11. Fed. R. Civ.
P. 11 advisory committee’s notes to 1993 amendments.
13
The filing of a petition has immediate serious
consequences, including the imposition of the
automatic stay under § 362 of the Code, which may
not be avoided by the subsequent withdrawal of the
petition. In addition, a petition for relief under
chapter 7 or chapter 11 may not be withdrawn
unless the court orders dismissal of the case for
cause after notice and a hearing.
Fed. R. Bankr. P. 9011 advisory committee’s notes to 1997
amendments. The exception evidences a concern that a party
subject to an automatic stay would be forced to choose between
seeking sanctions, which would require it to wait up to twenty-one
days before seeking dismissal of the petition, and the immediate
filing of a motion to dismiss the bad faith petition. Without the
exception, a party would be forced to abandon its request for
sanctions in order to seek dismissal of the petition as quickly as
possible.
Fortunately, we are able to leave these interesting issues to
another day, and move to 28 U.S.C. § 1927, the statute on which
the Bankruptcy Court based its award of sanctions against
Khoudary, only to later reverse itself anticipating that we would
do so if it did not. Unlike Rule 11 and Bankruptcy Rule 9011,
which are lengthy and impose specific procedural requirements
with which a party seeking sanctions must comply, § 1927 is short
and clear:
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.
28 U.S.C. § 1927.
Section 1927 “requires a court to find an attorney has (1)
multiplied proceedings; (2) in an unreasonable and vexatious
manner; (3) thereby increasing the cost of the proceedings; and (4)
doing so in bad faith or by intentional misconduct.” In re
14
Prudential Ins. Co. America Sales Practice Litig., 278 F.3d 175,
188 (3d Cir. 2002). Khoudary does not take issue with these
requirements, nor does he disagree that the principal purpose of
sanctions under § 1927 is “the deterrence of intentional and
unnecessary delay in the proceedings.” Zuk v. E. Pa. Psychiatric
Inst. of the Med. Coll. of Pa., 103 F.3d 294, 297 (3d Cir. 1996)
(citation and internal quotation marks omitted). Nor, we note, has
Khoudary ever argued that a bankruptcy court does not have the
power to impose sanctions under § 1927.
The Bankruptcy Court and the District Court both believed
that we would apply the supervisory rule with its Rule 11
foundation to sanctions under § 1927 given how the supervisory
rule had been reaffirmed and, in fact, extended by us in
Simmerman, Prosser, and Gary. But there are distinctions
between Rule 11 (and Bankruptcy Rule 9011) and § 1927,
distinctions which make a difference. Importantly, for example,
§ 1927 explicitly covers only the multiplication of proceedings
that prolong the litigation of a case and likely not the initial
pleading, as the proceedings in a case cannot be multiplied until
there is a case.8
The Tenth Circuit discussed our supervisory rule, but
essentially dismissed it, and concluded that a motion under § 1927
is not untimely if made after final judgment.
Although the Third Circuit has adopted a
“supervisory rule” that sanction issues under Rule
11 and the inherent power of the court must be
decided before or concurrent to the final judgment,
. . . we see no reason to extend such a rule to § 1927
in this circuit. Unlike Rule 11, the application of §
1927 may become apparent only at or after the
litigation’s end, given that the § 1927 inquiry is
whether the proceedings have been unreasonably
and vexatiously multiplied. Even the Third Circuit
seems to recognize that Rule 11 does not require
8
The Bankruptcy Court agreed, and awarded sanctions for
the Chapter 7 filing only—the “unnecessary return trip” to the
Bankruptcy Court.
15
such a “protracted scrutiny,” because Rule 11
focuses only on a challenged pleading or written
motion. Inherent-power sanctions are also capable
of a narrow focus, as the inquiry is whether a person
has abused the judicial process by acting “in bad
faith, vexatiously, wantonly, or for oppressive
reasons.” But we need not decide whether that
capability necessarily allows a court to reach
abusive conduct earlier through its inherent power
than through § 1927. We simply conclude that
§1927 sanctions are not untimely if sought or
imposed after final judgment.
Steinert v. Winn Group, Inc., 440 F.3d 1214, 1223 (10th Cir.
2006) (citations omitted); see also, e.g., Ridder v. City of
Springfield, 109 F.3d 288, 297 (6th Cir. 1997) (“Unlike Rule 11
sanctions, a motion for excess costs and attorney fees under §
1927 . . . [is not] untimely if made after the final judgment in a
case.”). Courts within the Third Circuit, almost without
exception, have similarly not applied the supervisory rule to
motions under § 1927. See, e.g., Loftus v. Se. Pa. Transp. Auth.,
8 F. Supp. 2d 458, 460 n.4 (E.D. Pa. 1998); In re Jazz Photo
Corp., 312 B.R. 524, 541 (Bankr. D.N.J. 2004);9 see also
Vandeventer v. Wabash Nat’l Corp., 893 F. Supp. 827, 842-43
(N.D. Ind. 1995) (report and recommendation of magistrate judge
adopted by district court and submitted for publication with
district court opinion). The Vandeventer opinion explained why
sanctions under § 1927 can “normally” only be determined when
the case is over:
9
One notable exception, however, is Langer v.
Presbyterian Medical Center of Philadelphia, Nos. 87-4000, 88-
1064, 91-1814, 1995 U.S. Dist. LEXIS 9448 (E.D. Pa. July 3,
1995). The Langer court, observing that we had interpreted the
Pensiero rule broadly and predicting that we would be amenable
to extending it beyond its Rule 11 roots, applied the supervisory
rule to preclude an award of sanctions under § 1927 for conduct
which had occurred years before and spawned piecemeal
litigation—“three final judgments have been entered . . . and yet,
the ‘zombie’ litigation over this conduct continues.” Id. at *6-*8.
16
Section 1927, is different [from Rule 11], in
that it is designed to have those counsel who engage
in unreasonable and vexatious conduct, pay the
“excess costs, expenses and attorney fees incurred
because of such conduct.” In most such cases, the
determination of what are truly excess costs,
expenses, and attorney fees cannot be determined
until the close of the litigation. In addition, § 1927
has been interpreted to impose a continuing
obligation on attorneys to dismiss claims that are no
longer viable. Given this “continuing obligation” it
is normally best to wait until the end of the
litigation to precisely determine what claims were
non-viable as well as when it was that they became
non-viable.
Id. at 845-46 (citations omitted).
We, too, conclude that, to the extent the supervisory rule
remains viable, it does not apply where sanctions are sought under
§ 1927. That having been said, however, a motion for sanctions
should be filed within a reasonable time. We need not define in
this case the outer limits of “reasonable” given that Segal filed his
motion for sanctions a mere nine days after the Chapter 7
petition—the petition that “multiplie[d] the proceedings”— was
voluntarily dismissed. Nine days clearly fits within any definition
of “outer limits.” The Bankruptcy Court, therefore, was well
within its rights to determine, as it initially did, that Khoudary
could be sanctioned under § 1927.
Or was it? The supervisory rule aside, courts are split as to
whether a bankruptcy court has the power to impose sanctions
under § 1927, with the answer to that question typically turning on
whether, in the words of § 1927, a bankruptcy court is a
jurisdictionally separate “court of the United States,” or whether,
for jurisdictional purposes, there is only one court—the district
court—of which a bankruptcy court is an arm, a unit. We have
not yet addressed the question.10
10
Courts within the Third Circuit have noted that whether
a bankruptcy court has the power to impose sanctions under §
17
Now, of course, no one would disagree that bankruptcy
courts are considered to be, and are respected as, courts of the
United States. The historical and statutory notes to § 1927,
however, refer to the definition of “court of the United States” in
28 U.S.C. § 451, the definition section for Title 28 in its entirety.
Section 451 states in pertinent part:
The term “court of the United States” includes the
Supreme Court of the United States, courts of
appeals, district courts constituted by chapter 5 of
[Title 28], including the Court of International
Trade and any court created by Act of Congress the
judges of which are entitled to hold office during
good behavior.
Bankruptcy courts, it is clear, are not listed explicitly in § 451.
Some courts have held that, given the definition of “court
of the United States” in § 451, a bankruptcy court does not have
the authority to impose sanctions under § 1927 nor, indeed, to
grant relief under other sections of Title 28—a bankruptcy court
1927 is an open question. See, e.g., Hayes v. Genesis Health
Ventures, Inc. (In re Genesis Health Ventures, Inc.), 362 B.R. 657,
661-62 (D. Del. 2007) (noting that Third Circuit has not expressly
ruled on question whether bankruptcy court has power to award
sanctions under § 1927); Raymark Indus., Inc., 1997 U.S. Dist.
LEXIS 8871, at *26 n.11 (questioning whether bankruptcy courts
have power to impose sanctions under § 1927); Argus Group
1700, Inc. v. Steinman, Nos. 96-8011, 96-8244, 96-8618, 1997
U.S. Dist. LEXIS 1834, at *11 n.2 (E.D. Pa. Feb. 20, 1997)
(noting that while Third Circuit has not ruled on whether
bankruptcy court has power to impose sanctions under § 1927,
several bankruptcy courts have imposed § 1927 sanctions where
bankruptcy case was filed in bad faith); In re Reath, 2006 Bankr.
LEXIS 4477, at *20 n.8(noting that courts have debated
availability of § 1927 in bankruptcy courts); In re Jazz Photo
Corp., 312 B.R. at 540 n.26 (noting that, although courts are split
on applicability of § 1927 to bankruptcy courts and Third Circuit
has not ruled on issue, several bankruptcy courts have imposed §
1927 sanctions where bankruptcy case was filed in bad faith).
18
is simply not a “court of the United States.” See, e.g., Jones v.
Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084,
1086 (10th Cir. 1994) (no authority to impose § 1927 sanctions,
especially in light of fact that Congress omitted from 1984
amendments provisions proposed in 1978 amendments, prior to
their effective date, which would have added bankruptcy courts to
§ 451);11 Perroton v. Gray (In re Perroton), 958 F.2d 889, 893-96
(9th Cir. 1992) (no authority to waive filing fees under 28 U.S.C.
§ 1915(a)); Gower v. Farmers Home Admin. (In re Davis), 899
F.2d 1136, 1138-40 (11th Cir. 1990) (no authority to award fees
under 28 U.S.C. § 2412); Miller v. Cardinale (In re Deville), 280
B.R. 483, 494 (B.A.P. 9th Cir. 2002) (no authority to award fees
under 28 U.S.C. § 1927); c.f. Internal Revenue Serv. v. Brickell
Inv. Corp. (In re Brickell Inv. Corp.), 922 F.2d 696, 699-701 (11th
Cir. 1991) (no authority to award fees under definition of “courts
of the United States” in 26 U.S.C. § 7430).
The reasoning of those cases is essentially as follows. The
definition of “court of the United States” in § 451 is limited to an
Article III court, because the judge or judges of the court must
“hold office during good behavior,” i.e., they are appointed for
life, assuming “good behavior.” Because bankruptcy judges are
appointed for a term of fourteen years under 28 U.S.C. §
152(a)(1), bankruptcy courts do not fall within the § 451 definition
of “court of the United States.” See In re Courtesy Inns, 40 F.3d
at 1086 (bankruptcy judges serve a specified term of fourteen
years); In re Perroton, 958 F.2d at 893-94 (the “good behavior”
language of § 451 tracks that of Article III and so a “court of the
United States” denotes an Article III court whose judges may be
removed only by impeachment). Moreover, bankruptcy courts are
not Article III courts because Section I of Article III requires that
judges “shall, at stated Times, receive for their Services, a
compensation, which shall not be diminished during their
Continuance in Office.” The salaries of bankruptcy judges are not
“immune from diminution by Congress.” N. Pipeline Constr. Co.
11
Other courts disagree, finding that the proposed
amendment was deleted as no longer necessary because Congress
had by that time made bankruptcy courts units of the district court.
See, e.g., Stone v. Casiello (In re Casiello), 333 B.R. 571, 575
(Bankr. D. Mass. 2005); see also infra note 14.
19
v. Marathon Pipe Line Co., 458 U.S. 50, 61 (1982).
Other courts have held that bankruptcy courts have the
authority to impose sanctions under § 1927. The Seventh and
Second Circuits have so concluded, albeit without discussion,
thereby finding, at least implicitly, that a bankruptcy court is a
“court of the United States.” See Adair v. Sherman, 230 F.3d 890,
895 n.8 (7th Cir. 2000); Baker v. Latham Sparrowbush Assoc. (In
re Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir.
1991).12
A number of courts, however, have gone beyond a bare
bones finding that a bankruptcy court is—or is not—a “court of
the United States” and concluded that, although a bankruptcy
court is not a jurisdictionally separate court for purposes of § 451,
it, nonetheless, is within the definition of § 451 because of its
status as a unit of the district court, with the district court clearly
being a “court of the United States.” See, e.g., Volpert v. Ellis (In
re Volpert), 177 B.R. 81, 88-89 (Bankr. N.D. Ill. 1995), aff’d, 186
B.R. 240 (N.D. Ill. 1995), aff’d on other grounds, 110 F.3d 494
(7th Cir. 1997).13 These cases conclude that bankruptcy courts are
not separate from, but rather are units of the district court and
thus, by analogy, “courts of the United States,” deriving their
jurisdiction from 28 U.S.C. § 157(a), which grants a district court
discretion to refer bankruptcy matters to the bankruptcy courts.
12
We note that Adair cited In re Volpert, 110 F.3d 494
(7th Cir. 1997), as the sole support for its conclusion that
bankruptcy courts can impose § 1927 sanctions, but the
Volpert court explicitly left that question unanswered. See id. at
500.
13
Bankruptcy courts have also been deemed to be units of
the district court under statutory provisions other than § 451. See,
e.g., United States v. Yochum (In re Yochum), 89 F.3d 661, 668-69
(9th Cir. 1996) (bankruptcy courts are units of district court and
are by analogy “courts of the United States” as defined by 26
U.S.C. § 7430); Grewe v. United States (In re Grewe), 4 F.3d 299,
304 (4th Cir. 1993) (district courts are “courts of the United
States” and bankruptcy courts, as units of district court, qualify as
“courts of the United States” under 26 U.S.C. § 7430).
20
See also D&B Countryside, L.L.C. v. Newell (In re D&B
Countryside, L.L.C.), 217 B.R. 72, 76 n.5 (Bankr. E.D. Va. 1998)
(bankruptcy court is unit of district court and can grant costs under
28 U.S.C. § 1920 by virtue of 28 U.S.C. §§ 151 and 157).
Perhaps the most comprehensive examination of the
jurisdictional scheme created in response to Northern Pipeline by
the Bankruptcy Amendments and Federal Judgeship Act of 1984
(“BAFJA”), Pub. L. No. 98-353, 98 Stat. 333 (1984),14 is found in
the bankruptcy court’s opinion in In re Volpert. The court
concluded, following an exhaustive analysis, that the answer to
whether a bankruptcy court can entertain a motion under § 1927
does not turn on whether it is a “court of the United States”;
rather, it turns on whether § 1927 should be construed to prevent
a referral that is “clearly” within the scope of § 157 and the “very
broad referral order” of the district court. In re Volpert, 177 B.R.
at 89-90. The court determined that § 1927 should not be so
construed. Because, therefore, a district court, as a court of the
United States, may impose sanctions under § 1927, it may also
refer a motion which requests the imposition of such sanctions to
a bankruptcy court. Id. at 90.
The Seventh Circuit affirmed In re Volpert on an
alternative ground—the bankruptcy court had “ample authority”
to sanction misbehavior under 11 U.S.C. § 105, Bankruptcy Rule
9011, and the court’s inherent power. In re Volpert, 110 F.3d at
500-01. That being so, the Seventh Circuit found no need to reach
the question of whether the bankruptcy court could also impose
14
Northern Pipeline held that the grant to the bankruptcy
courts of original jurisdiction over all bankruptcy matters in the
Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat.
2549 (1978), did not pass constitutional muster. Congress
subsequently passed BAFJA, thereby establishing the
jurisdictional scheme in effect today. Under BAFJA, Congress
empowered district courts to refer “any or all cases under title 11
and any or all proceedings arising under title 11 or arising in or
related to a case under title 11" to bankruptcy courts. 28 U.S.C.
§ 157(a). Bankruptcy courts became units of the district courts
and bankruptcy judges became judicial officers of the district
courts. 28 U.S.C. §§ 151 and 152.
21
sanctions under § 1927. Id. at 500. The Eighth Circuit similarly
saw no need to do so, stating as follows:
Although we have questioned whether a bankruptcy
court has the power to award sanctions under §
1927, we conclude that the court had ample
alternative authority to sanction . . . . Section 105
gives to bankruptcy courts the broad power to
implement the provisions of the bankruptcy code
and to prevent an abuse of the bankruptcy process,
which includes the power to sanction counsel. . . .
[and] jurisdiction under Bankruptcy Rule 9011 to
assess attorney’s fees as sanctions. . . .
Walton v. LaBarge (In re Clark), 223 F.3d 859, 864 (8th Cir.
2000) (citations omitted).
We will reach the question. We find that although a
bankruptcy court is not a “court of the United States” within the
meaning of § 451, it is a unit of the district court, which is a “court
of the United States,” and thus the bankruptcy court comes within
the scope of § 451. Under 28 U.S.C. § 157 and the Standing
Order of the United States District Court for the District of New
Jersey, which delegate authority to the bankruptcy courts in the
District of New Jersey to hear Title 11 cases as well as “any and
all proceedings” necessary to hear and decide those cases, the
Bankruptcy Court had the authority to impose sanctions against
Khoudary under § 1927.
We will, therefore, vacate the order of the District Court
which affirmed the orders of the Bankruptcy Court denying
Segal’s motion for sanctions and his motion for reconsideration of
that denial. We will remand for a determination as to whether
sanctions should be imposed against Khoudary under § 1927
and/or against SSR and Khoudary under one or more of the Rules
we have discussed or, perhaps, under § 105. Although we have
not found it necessary to address all the ways in which § 1927, the
Rules, and § 105 differ in scope and impact, we trust that this
Opinion gives the parties, the Bankruptcy Court, and the District
Court the guidance they may heretofore have lacked.
22