Curtis A. Crofford v. Conseco Finance ( 2003 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 02-6075 EA
In re: *
*
Curtis A. Crofford, and *
Maria E. Crofford, *
*
Debtors. *
*
Curtis A. Crofford, and * Appeal from the United States
Maria E. Crofford, * Bankruptcy Court for the
* Eastern District of Arkansas
Appellants, *
*
v. *
*
Conseco Finance Servicing Corporation, *
*
Appellee. *
Submitted: October 29, 2003
Filed: December 8, 2003
Before SCHERMER, DREHER, and FEDERMAN, Bankruptcy Judges
SCHERMER, Bankruptcy Judge
The debtors, Curtis A. Crofford and Maria E. Crofford (“Debtors”), appeal the
bankruptcy court order denying the Debtors’ motion to reopen their case and
imposing monetary sanctions on the Debtors’ counsel. We have jurisdiction over the
appeal from the final order of the bankruptcy court denying the motion to reopen and
imposing sanctions. See 28 U.S.C. § 158(b). For the reasons set forth below, we
partially affirm and partially reverse and remand.
ISSUE
The issue on appeal is whether the court properly imposed monetary sanctions
on the Debtors’ counsel payable to Conseco Finance Servicing Corp. (“Creditor”)
pursuant to 11 U.S.C. § 105 and Federal Rule of Bankruptcy Procedure 9011. We
conclude that: (1) the court failed to provide notice of its intent to impose sanctions
pursuant to 11 U.S.C. § 105 and therefore could not rely on such provision for the
award of sanctions; (2) the court gave proper notice authorizing an award of sanctions
pursuant to Federal Rule of Bankruptcy Procedure 9011; (3) the court properly
exercised its discretion to determine that sanctions were appropriate under Rule 9011;
and (4) the court’s ability to award monetary sanctions was limited by Rule
9011(c)(2) to an award payable to the court and not payable to an opponent.
BACKGROUND
On January 25, 2000, the Debtors executed two promissory notes in the
principal amounts of $13,000 and $61,858.50 in favor of the Creditor. The two
promissory notes were secured by real estate mortgages.
On August 20, 2000, the Debtors filed a petition for relief pursuant to Chapter
7 of the Bankruptcy Code. On December 14, 2000, the Debtors received a discharge
and on January 16, 2001, the Debtors’ bankruptcy case was closed.
2
In 2001, the Creditor filed a complaint in equity in the Circuit Court of Pulaski
County, Arkansas (“State Court”) seeking a reformation of the legal descriptions and
foreclosure of its interest under the mortgages. Thereafter the Debtors filed a motion
to reopen their bankruptcy case to address the issue of the impact of their discharge
on the Creditor’s claims raised in the State Court litigation. The bankruptcy court
denied the motion to reopen. The Debtors filed a motion to reconsider the denial of
the motion to reopen which the bankruptcy court also denied. The Debtors appealed
the orders denying the motion to reopen and denying the motion to reconsider to this
court which denied as untimely the appeal with respect to the order denying the
motion to reopen and affirmed the order denying the motion to reconsider. Crofford
v. Conseco Finance Servicing Corp. (In re Crofford), 277 B.R. 109 (B.A.P. 8th Cir.
2002).1
On July 23, 2003, the Debtors filed another motion to reopen their bankruptcy
case. In the second motion, the Debtors sought to reopen the case to file an adversary
proceeding against the Creditor requesting damages for violation of the discharge
injunction of 11 U.S.C. § 524 and seeking a determination regarding the
dischargeability of a certain indebtedness of the Debtors to the Creditor created by
the deed reformation litigation pending before the State Court. On August 16, 2002,
the bankruptcy court entered its order denying the motion to reopen. The court
determined that the allegations in the second motion to reopen were substantially the
same as the allegations the Debtors had made in the first motion, which was the
subject of the prior appeal to this court. The court raised the issue of a possible
violation of Federal Rule of Bankruptcy Procedure 9011 and directed the Debtors and
their counsel to show cause why they should not be sanctioned under Rule
9011(c)(1)(B) for raising legal issues that had previously been raised and decided.
1
For a more detailed history of the dispute between these parties, see our
prior opinion, 277 B.R. at 111-12.
3
On August 26, the Debtors filed a motion to alter or amend the order denying
the second motion to reopen. After the Creditor filed its response to such motion and
the Debtors filed their reply, the Debtors filed a motion to amend the motion to alter
or amend. A hearing was held on September 18, 2002, on the motion to alter or
amend, the motion to amend the motion to alter or amend, and the show cause. The
Creditor orally moved for an award of attorneys’ fees and costs at the hearing. The
court denied the motion to alter or amend and the motion to amend the motion to alter
or amend. The court ruled that it would enter sanctions and took that matter under
advisement. On November 14, 2002, the court entered its order denying the motion
to alter or amend judgment, denying the motion to amend the motion to alter or
amend, and imposing monetary sanctions on the Debtors’ counsel in the amount of
$3,000 payable to the Creditor.
The Debtors appealed the November 14 order as well as the original order
denying the second motion to reopen. The Debtors abandoned the appeal with
respect to the denial of the motion to reopen and the reconsideration of such denial.2
The sole issue to be decided at this juncture is the propriety of the award of
sanctions.3
2
The Creditor filed bankruptcy during the pendency of this appeal. Despite
several opportunities to obtain relief from the automatic stay in the Creditor’s
bankruptcy proceeding, the Debtors failed to do so. The Debtors indicated in their
brief that the pending appeal is limited to the issue of sanctions imposed on the
Debtors’ counsel. (Appellants’ Brief at 3.)
3
The Debtors’ counsel rather than the Debtors is the true party-in-interest to
this appeal and should have filed a separate notice of appeal. This technical
deficiency does not prevent our jurisdiction over this appeal, however. Retail
Flooring Dealers of America, Inc. v. Beaulieu of America, LLC, 339 F.3d 1146,
1148-49 (9th Cir. 2003); Laurino v. Tate, 220 F.3d 1213, 1218 (10th Cir. 2000);
Corp. of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints
v. Associated Contractors, Inc., 877 F.2d 938, n.1 (11th Cir. 1989). See also
Gordon v. Unifund CCR Partners, 345 F.3d 1028 (8th Cir. 2003)(caption for
4
STANDARD OF REVIEW
An award of sanctions involves a consideration of three types of issues: factual,
legal, and discretionary. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399, 110
S. Ct. 2447, 2457, 110 L. Ed. 2d 359 (1990) First, a court must consider factual
questions regarding the nature of the attorney’s inquiry prior to filing the pleading
and the factual basis for the pleading. Next, a court must consider legal issues to
determine if the pleading is warranted by existing law or a good faith argument for
a change in the law and whether the attorney’s conduct violated Rule 9011. Finally,
if a court determines that sanctions are warranted, it must exercise discretion to
ensure the sanction is appropriately tailored to the situation. Id.
We review the award of sanctions for an abuse of discretion. Cooter & Gell
v. Hartmarx Corp., 496 U.S. 384, 399-405, 110 S. Ct. 2447, 2457-2461, 110 L. Ed. 2d
359 (1990); Gordon v. Unifund CCR Partners, 345 F.3d 1028, 1030 (8th Cir. 2003);
MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 624 (8th Cir. 2003); Coonts v. Potts, 316
F.3d 745, 753 (8th Cir. 2003); Schwartz v. Kujawa (In re Kujawa), 270 F.3d 578, 581-
82 (8th Cir. 2001); Grunewaldt v. Mut. Life Ins. Co. of New York (In re Coones Ranch,
Inc.), 7 F.3d 740, 743 (8th Cir. 1993); Ebersold v. DeLaughter (In re DeLaughter),
213 B.R. 839, 841 (B.A.P. 8th Cir. 1997). The review of the imposition of sanctions
under Federal Rule of Bankruptcy Procedure Rule 9011 necessarily requires an
examination of the underlying factual and legal claims. Cooter & Gell v. Hartmarx
Corp., 496 U.S. at 405, 110 S.Ct. at 2461; MHC Inv. Co. v. Racom Corp., 323 F.3d
at 624. We reverse the award of sanctions only if it was based on an erroneous view
of the law or on a clearly erroneous assessment of the evidence. Cooter & Gell v.
Hartmarx Corp., 496 U.S. at 405, 110 S.Ct. at 2461; MHC Inv. Co. v. Racom Corp.,
323 F.3d at 624; DeLaughter, 213 B.R. at 841. The facts are not in dispute; however,
appeal of sanction award against attorney is in the name of client and not
attorney).
5
whether the Debtors’ motion was warranted by existing law or a nonfrivolous
argument for extension, modification, or reversal of the law is in dispute.
Accordingly, we review the award of sanctions to determine if it was based on an
erroneous view of the law and to ensure that the court did not abuse its discretion in
tailoring the award.
DISCUSSION
A bankruptcy court can award sanctions pursuant to 11 U.S.C. § 105 or Federal
Rule of Bankruptcy Procedure 9011. Section 105 of the Bankruptcy Code recognizes
the bankruptcy court’s inherent authority to issue any order that is necessary or
appropriate to carry out the provisions of this title. 11 U.S.C. § 105(a). Rule 9011(c)
authorizes a court to impose sanctions by motion or on its own initiative. In either
event, due process requires notice and an opportunity to respond before the
imposition of sanctions.
Every pleading filed by a represented party must be signed by an attorney of
record. Fed. R. Bankr. P. 9011(a). By presenting a motion to the court, the signing
attorney is certifying, to the best of the attorney’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances, that the motion is not
being presented for any improper purpose; the legal contentions therein are warranted
by existing law or by a nonfrivolous argument for the extension, modification, or
reversal of existing law or the establishment of new law; and the factual allegations
therein have or are likely to have evidentiary support. Fed. R. Bankr. P. 9011(b).
If, after notice and a reasonable opportunity to respond, a court determines that
a motion was presented for an improper purpose, was not warranted by law or a
nonfrivolous argument for extension, modification, or reversal thereof or the
establishment of new law, or lacks evidentiary support, the court may impose
sanctions on the attorney who filed the motion. Fed. R. Bankr. P. 9011(c). A request
6
for sanctions can be initiated by motion of a party or by a show cause order issued
by the court. Fed. R. Bankr. P. 9011(c)(1). Any sanction imposed must be limited
to what is sufficient to deter repetition of such conduct or comparable conduct by
others similarly situated. Fed. R. Bankr. P. 9011(c)(2). Sanctions may be monetary
or non-monetary; however, where the court initiates the award of sanctions by a show
cause order, monetary sanctions are limited to the award of a penalty payable to the
court. Fed. R. Bankr. P. 9011(c)(2).4 Furthermore, a court may not issue monetary
sanctions on its own initiative unless the court issues a show cause order before a
voluntary withdrawal or settlement of the offensive pleading. Fed. R. Civ. P.
9011(c)(2)(B).
In the instant case, the court issued its order for the Debtors and their counsel
to show cause why they should not be sanctioned under Rule 9011(c)(1)(B) for filing
a motion to reopen raising legal issues that had previously been raised and decided.
The Debtors and their counsel were not given notice that the court would rely on any
4
Federal Rule of Bankruptcy Procedure 9011(c)(2) states as follows:
Subject to the limitations in subparagraphs (A) and (B), the sanction
may consist of, or include, 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 expense incurred as a direct result of the violation.
(Emphasis added.) Subparagraph (A) prohibits the imposition of monetary
sanctions on a represented party for filing a pleading which is not warranted by
existing law or a nonfrivolous argument for the extension, modification, or
reversal of existing law or the establishment of new law. A represented party is
entitled to rely on its attorney to determine if a pleading is warranted by existing
law. Subparagraph (B) prohibits a court-initiated award of monetary sanctions if
the offensive pleading is voluntarily withdrawn or settled prior to the issuance of a
show cause order.
7
authority other than Rule 9011(c)(1)(B) for the imposition of sanctions. Given the
serious nature of sanctions, due process requires specific notice of the possibility of
sanctions. Here, the imposition of sanctions should be limited to the authority
pursuant to which notice of the possibility of sanctions was issued. Therefore the
court’s award of sanctions must comply with Rule 9011, and cannot be justified by
reliance on the court’s inherent powers or 11 U.S.C. ¶ 105.5 Accordingly, we review
the award of sanctions under Rule 9011 only.
The Debtors and their counsel were given proper notice and an opportunity to
respond to the court’s concerns that they had violated Rule 9011 by attempting to re-
raise a legal argument which they had already lost. In response to the show cause
order, the Debtors filed the motion to alter or amend which set forth the Debtors’
counsel’s reliance on a certain opinion issued by the Ninth Circuit Bankruptcy
Appellate Panel, In re Menk, 241 B.R. 896 (B.A.P. 9th Cir. 1999), for the proposition
that the denial of the prior motion to reopen was not the law of the case and therefore
did not predetermine the outcome of the second motion to reopen. The Debtors’
counsel cited the Menk decision in support of its request to reconsider the decision
not to reopen the case and in support of its argument that the second motion to reopen
was not legally frivolous. At the hearing when given the opportunity to respond to
the show cause order by supplementing prior pleadings, the Debtors’ counsel replied,
“Nothing further, Your Honor.” (Transcript at page 4.)
In determining whether the Debtors’ counsel violated Rule 9011, the court
must consider whether the second motion to reopen was warranted by existing law
or a nonfrivolous argument for the extension, modification, or reversal of existing law
or the establishment of new law. The Debtors’ counsel’s personal belief in the merits
of the second motion is insufficient to avoid the imposition of sanctions. Rather, an
5
In its order imposing sanctions, the court noted that a bankruptcy court
has inherent power to sanction persons appearing before it.
8
objective analysis is required to determine whether a reasonable and competent
attorney would believe in the merits of the second motion. Coonts v. Potts, 316 F.3d
745, 753 (8th Cir. 2003).6 Here, the Debtors’ counsel had previously filed a motion
to reopen which was denied by the bankruptcy court. The Debtors’ counsel appealed
that order to this court which affirmed the prior order. The Debtors filed the second
motion again seeking the very relief which had been denied by the bankruptcy court
and upheld on appeal. A reasonable attorney who had lost a motion, appealed, and
lost on appeal should not expect to file the same motion again and get a different
result. Otherwise orders would have no finality.
The facts had not changed between the time of the first motion to reopen and
the time of the second motion to reopen. The only difference was that at the time of
the second motion, the litigation pending before the State Court was farther along in
the process. This is not a new or materially different fact which would warrant a
different outcome for the second motion. Additionally, the Debtors’ counsel was
under no special time pressure, a factor which might otherwise impact the
reasonableness of her pre-filing legal research; rather, the dispute with the Creditor
was the same one which dated back to the original bankruptcy filing.7
6
We note that other circuits require a higher mens rea standard comparable
to the standard for imposing contempt where a court initiates the award of
sanctions under Rule 9011. See, e.g. Kaplan v. Daimler Chrysler, A.G., 331 F.3d
1251, 1255 (11th Cir. 2003); In re Pennie & Edmonds, LLP, 323 F.3d 86 (2nd Cir.
2003). While the Eighth Circuit Court of Appeals has recognized that the standard
(i.e. claims must be warranted by existing law or by a nonfrivolous argument for
the extension, modification, or reversal of existing law) is applied with particular
strictness where the sanctions are imposed on the court’s own motion, MHC Inv.
Co. v. Racom Corp., 323 F.3d 620, 623 (8th Cir. 2003), it applied the objective
standard of a reasonable attorney to the court-initiated award of sanctions in the
Coonts case.
7
See, e.g., Grunewaldt v. Mut. Life Ins. Co. of New York (In re Coones
Ranch, Inc.), 7 F.3d 740, 743 (8th Cir. 1993), recognizing time pressure as a factor
9
The Debtors’ counsel exhibited a lack of respect for the bankruptcy court and
for this court by filing the second motion after both the trial court and this court had
denied counsel’s request in the first motion. Such lack of respect supports the
imposition of sanctions. Ebersold v. DeLaughter (In re DeLaughter), 213 B.R. 839,
844 (B.A.P. 8th Cir. 1997).
The Debtors’ counsel disregarded the established law of the case when filing
the second motion to reopen. The Debtors’ counsel argues that the denial of a motion
to reopen does not establish the law of the case nor prevent a second motion to
reopen. The Debtors’ counsel relies on a certain opinion issued by the Ninth Circuit
Bankruptcy Appellate Panel, In re Menk, 241 B.R. 896 (B.A.P. 9th Cir. 1999), for this
proposition. The Debtors’ counsel’s reliance on the Menk opinion is misguided. A
reasonable reading of the opinion does not support the conclusion that it stands for
the proposition for which it has been cited by the Debtors’ counsel.8 The Menk case
did not involve serial motions to reopen; rather it involved a single motion to reopen
which was granted and the appeal of which was ultimately determined to be moot.
The Debtors’ counsel’s reliance on Menk for the proposition that an order denying a
motion to reopen a bankruptcy case does not become the law of the case does not rise
to the level of what a reasonable and competent attorney would believe. Coonts v.
in evaluating the reasonableness of a pre-filing inquiry.
8
In Menk, a judgment creditor moved to reopen a Chapter 7 case to
challenge the dischargeability of a certain debt. The debtor unsuccessfully
attempted to appeal the order reopening the case. Thereafter the bankruptcy court
entered judgment excepting the debt from discharge. The debtor then renewed his
appeal of the order reopening his bankruptcy case but did not appeal the judgment
of nondischargeability. On appeal, the Ninth Circuit Bankruptcy Appellate Panel
held that the appeal was moot because reopening the bankruptcy case was not a
pre-requisite to subject matter jurisdiction over a non-dischargeability proceeding
and that the debtor lacked standing to appeal the order reopening the case.
10
Potts, 316 F.3d 745, 753 (8th Cir. 2003). Consequently, the court properly concluded
that the Debtor’s counsel had violated Rule 9011 and that sanctions were warranted.
Once a court determines that a violation of Rule 9011 has occurred and that an
award of sanctions is warranted, the court must decide what sanctions are appropriate.
In fashioning the award, the court must comply with the limitations set forth in Rule
9011. Sanctions may normally be monetary or non-monetary. Fed. R. Bankr. P.
9011(c)(2). However, monetary sanctions may be awarded following a show cause
order only if the show cause order was issued before a voluntary dismissal or
settlement of the claim out of which the sanctionable conduct arose. Fed. R. Bank.
P. 9011(c)(2)(A). Here the second motion to reopen was never dismissed or settled.
Therefore an award of monetary sanctions was appropriate.
Sanctions must be limited to what is sufficient to deter repetition of such
conduct or comparable conduct by others similarly situated. Fed. R. Bankr. P.
9011(c)(2). The sanctions imposed – $3,000 – were appropriately limited to an
amount sufficient to deter the inappropriate conduct.
Where the court initiates the award of sanctions by a show cause order,
monetary sanctions are limited to the award of a penalty payable to the court. Fed.
R. Bankr. P. 9011(c)(2). The court has no discretion to award monetary sanctions
payable to an opponent in such circumstances. Accordingly, the bankruptcy court’s
award of monetary sanctions payable to the Creditor must be reversed.9
9
We note that the Creditor asked for fees and costs at the hearing on the
show cause order and the motion to alter or amend. While an award of sanctions
may be payable to an opponent when sanctions are requested by the opponent, a
request for sanctions by an opponent must be in writing and must comply with the
safe-harbor provisions of Rule 9011(c)(1)(A). Consequently, the Creditor’s oral
request for fees at the show cause hearing cannot justify the award of monetary
sanctions payable to the Creditor.
11
CONCLUSION
The bankruptcy court did not abuse its discretion in determining that the
Debtors’ attorney’s conduct in filing the second motion to reopen warranted an award
of sanctions under Rule 9011. Nor did it abuse its discretion in setting a dollar
amount of sanctions which was appropriate in the circumstances. However, where
the sanctions were initiated on the court’s show cause order, an award of monetary
sanctions was limited to a penalty payable to the court. Consequently, the order
imposing monetary sanctions payable to the Creditor is reversed and remanded for
a determination of appropriate sanctions under the circumstances.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT
12