Fellheimer, Bichen & Braverman, P.C. v. Charter Technologies, Inc.

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
6-22-1995
Fellheimer v Charter Tech
Precedential or Non-Precedential:
Docket 94-3461
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"Fellheimer v Charter Tech" (1995). 1995 Decisions. Paper 171.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
-------------
No. 94-3461
-------------
FELLHEIMER, EICHEN & BRAVERMAN, P.C.,
v.
CHARTER TECHNOLOGIES, INCORPORATED,
d.b.a. ELGIN ELECTRONICS;
KNOX, McLAUGHLIN, GORNALL & SENNETT, P.C.;
and GUY C. FUSTINE, ESQUIRE,
Fellheimer, Eichen, Braverman
and Kaskey, P.C.,
Appellants
------------------------------------------------------
On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civ. No. 93-345E)
------------------------------------------------------
Argued: March 7, 1995
Before: BECKER, SCIRICA, and
WOOD, JR.,* Circuit Judges
(Filed: June 22, 1995)
DAVID L. BRAVERMAN, ESQUIRE (ARGUED)
MAIA CAPLAN, ESQUIRE
KENNETH S. GOODKIND, ESQUIRE
MATTHEW A. NYMAN, ESQUIRE
W. THOMAS TITHER, ESQUIRE
2100 One Liberty Place
Philadelphia, PA 19103
Attorneys for Appellant
GUY C. FUSTINE, ESQUIRE
RICHARD A. LANZILLO, ESQUIRE (ARGUED)
120 West Tenth Street
Erie, PA 16501
* The Honorable Harlington Wood, Jr., United States Circuit
Judge for the Seventh Circuit, sitting by designation.
Attorneys for Appellees.
-----------------------------
OPINION OF THE COURT
-----------------------------
WOOD, JR., Circuit Judge.
Fellheimer, Eichen & Braverman, P.C. ("FE&B") appeals the
denial of its entire fees application. The bankruptcy court
found that during the course of FE&B's representation of Charter
Technologies, Incorporated, d.b.a. Elgin Electronics ("the
Debtor"), in the context of the Debtor's Chapter 11 proceedings,
that FE&B had wrongfully represented the interests of the
Debtor's president and principal shareholder, Joseph Burke. The
bankruptcy court found that FE&B had sought to further Mr.
Burke's interests over the interests of the Debtor by, among
other things, filing a patently false $4,250,000 lawsuit against
the counsel to the Official Committee of Unsecured Creditors, and
by making repeated and knowing misrepresentations to the
bankruptcy court. The bankruptcy court further found that FE&B
was motivated throughout its representation of the Debtor by
subjective bad faith. Consequently, the bankruptcy court
sanctioned FE&B by denying its fees application in its entirety.
On appeal, the district court upheld the denial of FE&B's fees
application. The district court did, however, substitute its own
justifications for the bankruptcy court's action. Because we
feel that the bankruptcy court's factual findings are not clearly
erroneous, and because we find the district court's
justifications for the sanctions to be acceptable, we affirm the
denial of FE&B's entire fees application.
I. BACKGROUND
On January 20, 1993, the Debtor filed a voluntary petition
under Chapter 11 of the Bankruptcy Code. The Debtor also filed a
motion at this time to employ FE&B as its counsel. On February
17, 1993, the bankruptcy court conducted a hearing regarding the
employment of FE&B. Based, in part, on the testimony of Alan
Fellheimer that FE&B would seek to file a reorganization plan for
the Debtor between March 15 and March 30, 1993, and that FE&B had
"already arranged . . . a significant equity infusion into the
company, seven figure infusion, a million dollars," the
bankruptcy court approved the employment of FE&B.
Despite these confident assertions, neither a reorganization
plan nor a large equity infusion was forthcoming by the end of
March 1993, and a meeting was subsequently arranged to discuss
the future of the Debtor. This meeting, which took place on May
20, 1993, was attended by Mr. Fellheimer; Mr. Burke; Guy Fustine
of Knox, McLaughlin, Gornall & Sennett, P.C. ("the Knox Firm"),
counsel to the Official Committee of Unsecured Creditors ("the
Committee"); and certain representatives of the Committee. The
representatives of the Committee indicated that the Committee was
willing to work with the Debtor to solve its financial woes, to
wit, the Committee would be willing to accept a plan in which the
unsecured creditors as a whole exchanged debt for equity, or a
plan in which two members of the Committee--REM Electronics and
Advacom, Incorporated--would extend credit to the Debtor or
invest cash in the Debtor.
The representatives of the Committee also made it clear that
they lacked confidence in the managerial skills of Mr. Burke: If
the Debtor's reorganization plan was hinged upon the long-term
viability of the Debtor, the Committee pledged to withhold its
support unless the Debtor's top-level management was replaced--
particularly Mr. Burke. At this point, Mr. Burke and Mr.
Fellheimer left the meeting to confer privately. Upon their
return, Mr. Fellheimer presented the representatives of the
Committee with Mr. Burke's demands. According to Mr. Fellheimer,
Mr. Burke would agree to leave the management of the Debtor only
if the reorganization plan provided him with: (1) a written
employment contract with the Debtor; (2) an equity position in
the Debtor; and (3) a release from the personal guarantees Mr.
Burke had previously executed which secured certain obligations
of the Debtor.
Following this meeting, in a letter dated June 4, 1993, Mr.
Fustine reiterated the Committee's views regarding Mr. Burke's
long-term future in the Debtor's management.1 In response, in
1
In the June 4th letter, Mr. Fustine stated that
[t]he position of the Committee with respect to
Joe Burke is clear. It will not accept any Plan of
Reorganization which provides for payments over time or
which provides for the conversion of debt to equity if
the Plan also provides that Joe Burke will continue in
a management role. Joe Burke is believed to be a part
of the problem and not a part of the cure. I am
telling you this again now so that there is no
confusion in the future.
letters dated June 8 and June 14, 1993, Mr. Fellheimer charged
Mr. Fustine with representing individual members of the Committee
and demanded that the Knox Firm withdraw as counsel to the
Committee and, moreover, that certain members of the Committee
also withdraw from the Committee. Mr. Fellheimer furthermore
threatened to file a motion with the bankruptcy court seeking the
dismissal of the Knox Firm if the Knox Firm did not voluntarily
withdraw. Mr. Fustine and the Knox Firm responded by again
restating the position of the Committee in a letter to FE&B dated
June 16, 1993. That same day, Mr. Fustine and the Knox Firm also
filed a motion on behalf of the Committee to ratify the
appointment of Mr. Fustine and the Knox Firm as the Committee's
counsel.
FE&B filed the Debtor's response to the Committee's motion
to ratify its counsel on June 28, 1993. FE&B also filed a seven-
count complaint on behalf of the Debtor against Mr. Fustine and
the Knox Firm seeking $4,250,000 in damages and a preliminary
injunction to prevent Mr. Fustine and the Knox Firm from
representing the Committee ("the complaint"). The complaint made
the following allegations: Count One charged Mr. Fustine and the
Knox Firm with breaching their fiduciary duty to the Committee by
representing individual members of the Committee; Counts Two and
Three charged Mr. Fustine and the Knox Firm with breaching a
contract that they had allegedly entered into with the Debtor
which required them to refrain from communicating with potential
investors in the Debtor; Counts Four and Five charged Mr. Fustine
and the Knox Firm with libeling and slandering the Debtor in
their letters of June 4 and June 16, 1993; Count Six charged Mr.
Fustine and the Knox Firm with intentionally and negligently
interfering with the Debtor's existing and prospective
contractual relations; and Count Seven charged Mr. Fustine and
the Knox Firm with unfairly competing with the Debtor by
representing individual members of the Committee. The complaint
was signed by Jeffrey Eichen of FE&B.
Viewing the complaint as an insurmountable barrier to a
successful reorganization effort, the bankruptcy court quickly
scheduled a hearing for July 8, 1993. Mr. Fellheimer telephoned
the court on July 6, 1993, however, and requested that the
hearing be rescheduled as Mr. Burke--whose testimony Mr.
Fellheimer characterized as essential to the complaint--was out
of the country and would not return before the hearing. The
bankruptcy court consequently rescheduled the hearing for August
3, 1993. In fact, Mr. Burke was not out of the country and Mr.
Fellheimer was aware of Mr. Burke's actual whereabouts on the
same day--July 6, 1993--that he telephoned the bankruptcy court.
On July 19, 1993, FE&B again sought to delay the hearing by
filing a motion to postpone the hearing. In this motion, FE&B
asserted that Vito Casoni, another allegedly essential witness,
would be unavailable on the new date of the hearing. The
bankruptcy court, however, refused to further reschedule the
hearing.
On July 20, 1993, the Knox Firm, Mr. Fustine, and the
Committee filed a Motion for Sanctions Pursuant to Bankruptcy
Rule 9011 and Rule 11 of the Federal Rule of Civil Procedure2
against FE&B ("the sanction motion"). The sanction motion
alleged that sanctions were appropriate in that the complaint
filed by FE&B lacked a reasonable basis in law and in fact and
that the complaint was filed for improper tactical purposes.
In one last salvo before the hearing, FE&B filed a Motion to
Disqualify Defendants from Acting as Legal Counsel to Witnesses
("motion to disqualify"). The motion to disqualify alleged that
Mr. Fustine and the Knox Firm suffered from an irreconcilable
conflict of interests due to their representation of individual
members of the Committee and due to their status as parties and
material witnesses in the litigation on the complaint.
On August 3, 1993, the hearing on the Debtor's complaint was
held. At the conclusion of the first day of the hearing, Mr.
Fellheimer sought to withdraw the complaint on behalf of the
Debtor and to terminate the entire adversary proceeding. In the
words of Mr. Fellheimer, the Debtor decided to withdraw the
complaint "[b]ecause it doesn't see any benefit . . . in
proceeding in the long run." Mr. Fellheimer further stated: "I
don't want to burden the Court any further with this. And I also
feel that . . . the best interest of the debtor would be served
by ending it and working towards a reorganization." The
bankruptcy court then withdrew the complaint and chastised Mr.
Fellheimer for, in its view, representing the interests of Mr.
2
Bankruptcy Rule 9011 essentially tracks Rule 11 in all
pertinent respects, as those rules then existed.
Burke over the interests of the Debtor.3 The Committee reserved
its right to proceed with its sanction motion at a later date.
On August 25, 1993, FE&B filed an interim fees and expenses
application for the period January 20, 1993, through August 21,
1993 ("fees application"). FE&B requested $200,275.50 in
compensation and $21,916.83 for the reimbursement of expenses.
The Committee thereafter filed an objection to FE&B's fees
application on September 23, 1993.
II. THE PROCEEDINGS BELOW
A. The Bankruptcy Court
The bankruptcy court held a hearing on the fees application
and on the sanction motion on October 20, 1993, and issued its
3
The bankruptcy court warned:
[Y]ou're on a knife's edge, Mr. Fellheimer. You're
representing Mr. Burke, he has no independent counsel.
He may be a lawyer himself, but he met with you outside
the Erie Club in order to determine what he should
personally get out of the reorganization for him to
step out as manager. In that instance you're acting as
his lawyer. And that's adverse to the interests of the
[Debtor].
. . . .
. . . You have to be very careful about how you
represent Mr. Burke. Because to the extent that you
represent him to the detriment of the [Debtor] and the
creditors, you're violating your fiduciary duty to the
[Debtor]. And you're representing him individually and
you're risking whatever fee you might get out of this.
. . . And for Mr. Burke to get upset because the
creditors committee thinks that he's incompetent, is
unfortunate. You as a lawyer, as a practicing lawyer
have to tone him down. You can't file this kind of
lawsuit that you filed here just because Mr. Burke is
upset. That's ridiculous.
opinion and order regarding these matters on November 2, 1993.
Charter Techs., Inc., d.b.a. Elgin Elecs. v. Knox, McLaughlin,
Gornall & Sennett, P.C. (In re Charter Techs., Inc.), 160 B.R.
925 (Bankr. W.D. Pa.). The bankruptcy court granted the sanction
motion and denied FE&B's entire fees application, except for
$15,000 which the court allowed for reimbursement of expenses.
The bankruptcy court also granted the motion of the Committee for
the appointment of a Chapter 11 trustee. In reaching its
decision, the bankruptcy court made the following factual
findings.
First, the bankruptcy court found that "[t]he evidence
establishing that Fustine and the Knox Firm represented the
Committee, and only the Committee, is overwhelming." Charter
Techs., 160 B.R. at 927. In this regard, the bankruptcy court
further found that "[t]he Debtor failed to present any evidence
that Fustine and the Knox Firm represented any individual member
of the Committee." Id.
Second, the bankruptcy court found that "[t]he overwhelming
evidence supports the fact that the language of the June 4th
letter accurately reflected the Committee's position." Id. at
928. The bankruptcy court found that the Debtor's allegations to
the contrary were based upon "a complete lack of evidence." Id.
The Debtor had attempted to prove that the June 4th letter was a
vehicle designed to further the interests of individual members
of the Committee, rather than a statement of the consensus of the
Committee. Towards this end, the Debtor alleged in its complaint
that two Committee members--Robert E. Miller and Frank
Slurkanich--telephoned Mr. Burke and "stated that Fustine and the
Knox Firm were not authorized to send the June 4th letter and
that it does not represent the position or opinion of the
Committee." Id. The bankruptcy court found, however, that Mr.
Slurkanich--a former employee of the Debtor--never denied the
authority of Mr. Fustine to send the June 4th letter. Instead,
Mr. Slurkanich merely indicated that he did not personally "put
out" the letter. Furthermore, the bankruptcy court found that
"Slurkanich did not call in response to the June 4th letter, but
rather in response to a notice of termination as a sales
representative which Slurkanich received from Burke on June 7,
1993, which Burke had issued in retaliation for the Committee's
June 4th letter!" Id. The bankruptcy court found, moreover,
that the Committee had objectively sound reasons for wishing to
replace Mr. Burke.4
Third, the bankruptcy court summarily rejected the Debtor's
defamation allegations. The Debtor had claimed that Mr. Fustine
and the Knox firm stated falsely that the Debtor had accumulated
$1,600,000 in pre-tax losses since October 1989 and that the
Debtor had nonetheless paid $315,000 in stock dividends over that
same time period. The bankruptcy court found that it was
"readily determin[able]" through the Debtor's own financial
4
The bankruptcy court cited a draft report prepared by the
accounting firm of Ernst & Young for a potential investor which
"identified numerous management deficiencies from which it would
have been reasonable for the Committee to determine the need to
replace Burke." Id.
records that these statements were "true and accurate." Id. at
929.
Fourth, the bankruptcy court found that there was
"absolutely no evidence" to support the Debtor's allegation that
Mr. Fustine breached an agreement that he had allegedly entered
into that forbade him from meeting with potential investors in
the Debtor. Id. According to the complaint, Mr. Fustine
breached this agreement when he met with Vito Casoni and George
Leone of SMG Control Systems. As the bankruptcy court found,
this meeting took place on May 20, 1993. The earliest date that
Mr. Fellheimer discussed such an agreement with Mr. Fustine,
however, according to Mr. Fellheimer's own time sheets, was May
21, 1993--one day after the alleged breach of the agreement took
place.
Fifth, the bankruptcy court found that, contrary to the
assertion in the Debtor's complaint, the statements of Mr.
Fustine to Mr. Casoni of SMG Control Systems did not cause SMG
Control Systems to lower its bid for the Debtor. Id. As the
bankruptcy court noted, the affidavit of Mr. Casoni submitted by
the Debtor explicitly states that "the session of May 20th with
Mr. Fustine did not alter SMG's offer as to price." The
bankruptcy court also found that Mr. Fustine did not, as further
asserted in the complaint, cause Kulicke & Soffa to withdraw its
business from the Debtor. Id. As indicated by the affidavit of
Jim King of Kulicke & Soffa, that firm "retracted business from
the debtor as a result of the debtor's inability to fulfill
Kulicke & Soffa's production schedule on time and serious
problems we perceive in the debtor's quality and recycling
procedure." The bankruptcy court found that FE&B had not
bothered to contact Mr. Casoni, or anyone at Kulicke & Soffa, to
ascertain the veracity of these allegations before filing the
complaint. Id.
Last, the bankruptcy court was greatly offended by Mr.
Fellheimer's misrepresentation to it that Mr. Burke would be out
of the country and unable to attend the hearing on the complaint
on the day it was originally scheduled. Id. at 929-30. After
noting that FE&B had made six telephone calls to the Debtor on
July 6, including at least one direct call between Mr. Fellheimer
and Mr. Burke, the bankruptcy court concluded: "There is no
rational basis favorable to Fellheimer as to why he would
represent to the Court on July 6 that he thought Burke was in
England and unavailable for the scheduled hearing on July 8."
Id. at 930.
On the strength of these preliminary findings, the
bankruptcy court determined that sanctions against FE&B were
appropriate:
Debtor's counsel failed to make any reasonable inquiry
into the underlying facts before filing the within
Complaint. Debtor's counsel knew or should have known
that many of the allegations were baseless without any
inquiry. . . .
. . . .
. . . The conclusion is inescapable that the
purpose of the Complaint was to separate the Committee
from its chosen counsel due to the fact that counsel
for the Committee was advocating the Committee's
position that it would be appropriate to remove Burke
from upper-level management.
. . . .
In short, Fellheimer filed a lawsuit against the
attorneys for the Creditors' Committee seeking $4.25
million in damages for the sole purpose of protecting
his real client, Burke, from the legitimate actions of
the Creditors' Committee in opposing Burke's management
of the Debtor's business. . . .
We further conclude that Fellheimer never had any
intent to proceed with a trial on the merits of this
complaint. He knew when he filed the Complaint that
the allegations were unsupported. His scheme was to
file the Complaint, demand the $4.25 million from the
Creditors' Committee counsel, and then delay a hearing
on the merits while he used the lawsuit as a wedge to
intimidate the Creditor's Committee and its counsel for
the benefit of Burke. . . . That illicit purpose plus
the total lack of any evidentiary basis for the serious
accusations made in the Complaint cry out for judicial
recognition and appropriate sanction.
Id. at 930-32.
After discussing the nature and scope of Rule 11 of the
Federal Rules of Civil Procedure and Bankruptcy Rule 9011, the
bankruptcy court decided to deny FE&B its entire fee in the case.
Although FE&B had arguably performed some services of value to
the Debtor, the bankruptcy court did not allow it any
compensation because "Fellheimer's inappropriate conduct affected
and continues to affect this entire case. Both the Debtor and
its counsel have exhibited conduct of dishonesty, incompetency
and gross mismanagement of the affairs of the Debtor." Id. at
933.
B. The District Court
FE&B then appealed the imposition of sanctions to the
district court. Before the district court, FE&B argued primarily
that the bankruptcy court's decision to impose Rule 11 and
Bankruptcy Rule 9011 sanctions was factually unsupported and that
FE&B's filing of the complaint was justified. FE&B also argued
that the bankruptcy court had erred by imposing Rule 11 and
Bankruptcy Rule 9011 sanctions upon the entire firm of FE&B,
instead of merely upon the individual attorney who had signed the
complaint, Mr. Eichen.
The district court first found that the record supported the
bankruptcy court's findings regarding the factual baselessness of
each of the complaint's material allegations. The district court
also found that the record supported the finding that FE&B filed
the complaint for an improper purpose and in subjective bad
faith.
The district court did, however, agree with FE&B that Rule
11 and Bankruptcy Rule 9011 sanctions, as they then existed,5
could only be imposed upon the individual attorney who had signed
the offending document. See Pavelic & LeFlore v. Marvel
Entertainment Group, 493 U.S. 120 (1989). The district court
nonetheless affirmed the imposition of sanctions on the following
alternative grounds: (1) FE&B waived the right to contest the
imposition of sanctions against it as a firm by failing to raise
the issue in the bankruptcy court and by failing to include the
issue in its Bankruptcy Rule 8006 statement of issues for
5
Effective December 1, 1993, after the bankruptcy court
had issued its opinion and order in this case, Rule 11 of the
Federal Rules of Civil Procedure was amended to explicitly allow
the imposition of sanctions against law firms.
appellate review; (2) the imposition of sanctions represented a
proper exercise of the bankruptcy court's inherent power to
sanction; and (3) the imposition of sanctions represented a
proper exercise of the bankruptcy court's authority under 11
U.S.C. § 328(c)6 to deny professional fees in appropriate cases.
Appeal to this court followed.
III. STANDARD OF REVIEW
Because the district court sat as an appellate court in
reviewing this matter, our own review of that court's factual and
legal determinations is plenary. Universal Minerals, Inc. v.
C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir. 1981). In
reviewing the bankruptcy court's determinations, we exercise the
same standard of review as the district court. Brown v.
Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d
Cir. 1988).
We may not set aside the bankruptcy court's factual findings
unless we first conclude that they are clearly erroneous.
Bankruptcy Rule 8013; Brown, 851 F.2d at 84 (citation omitted).
As we have stated before in other contexts, the clearly erroneous
standard is fairly stringent: "It is the responsibility of an
6
Section 328(c) provides:
[T]he court may deny allowance of compensation for
services and reimbursement of expenses of a
professional person employed under section 327 or 1103
of this title if, at any time during such professional
person's employment under section 327 or 1103 of this
title, such professional person is not a disinterested
person, or represents or holds an interest adverse to
the interest of the estate with respect to the matter
on which such professional person is employed.
appellate court to accept the ultimate factual determination of
the fact-finder unless that determination either is completely
devoid of minimum evidentiary support displaying some hue of
credibility or bears no rational relationship to the supportive
evidentiary data." Hoots v. Pennsylvania, 703 F.2d 722, 725 (3d
Cir. 1983) (citation omitted). Furthermore, in reviewing the
bankruptcy court's factual findings we are to give "due regard"
to the opportunity of that court to judge first-hand the
credibility of witnesses. Bankruptcy Rule 8013. Our review of
the bankruptcy court's legal determinations is plenary. Brown,
851 F.2d at 84.
In our review of the imposition of sanctions, the primary
question before us is whether the sanctioning court abused its
discretion. See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S.
384, 405 (1990) ("[A]n appellate court should apply an abuse-of-
discretion standard in reviewing all aspects of a district
court's Rule 11 determination."); Chambers v. Nasco, Inc., 501
U.S. 32, 55 (1991) ("We review a court's imposition of sanctions
under its inherent power for abuse of discretion."). We do not
seek to determine whether we would have applied the sanction
ourselves in the first instance. See Eavenson, Auchmuty &
Greenwald v. Holtzman, 775 F.2d 535, 540 (3d Cir. 1985)
IV. DISCUSSION
As discussed above, the bankruptcy court acted pursuant to
Rule 11 of the Federal Rules of Civil Procedure and Bankruptcy
Rule 9011 when it sanctioned FE&B by denying FE&B's fees
application. All parties are in agreement, however, that
sanctions could not properly be imposed against law firms under
the Supreme Court's interpretation of the version of Rule 11 then
in effect. See Pavelic & LeFlore v. Marvel Entertainment Group,
493 U.S. 120 (1989) (holding that Rule 11 sanctions may only be
imposed upon the attorney who actually signs the documents in
question). The district court affirmed the bankruptcy court's
denial of FE&B's fees application despite that court's
misapplication of Rule 11 by finding three alternative grounds
for upholding the sanction. The district court did so after
noting the Supreme Court's long-standing holding that "'[i]n the
review of judicial proceedings the rule is settled that if the
decision below is correct, it must be affirmed, although the
lower court relied upon a wrong ground or gave a wrong reason.'"
Brown v. Allen, 344 U.S. 443, 459 (1953) (quoting Helvering v.
Gowran, 302 U.S. 238, 245 (1937)) (other citation omitted). Of
the three grounds provided by the district court, we find the
characterization of this sanction as an exercise of the
bankruptcy court's inherent power to be the most appropriate
justification under these circumstances and it is to this ground
that we first turn.
A. Inherent Power to Sanction
In Chambers v. Nasco, Inc., 501 U.S. 32 (1991), the Supreme
Court addressed the nature and scope of the federal courts'
inherent power to control the conduct of those who appear before
them. The Court began by surveying its long history of case law
in this area: "It has long been understood that '[c]ertain
implied powers must necessarily result to our Courts of justice
from the nature of their institution,' powers 'which cannot be
dispensed with in a Court, because they are necessary to the
exercise of all others.'" Id. at 43 (quoting United States v.
Hudson, 7 Cranch 32, 34 (1812)) (other citation omitted). Among
the implied and "'incidental'" powers of a federal court is the
power "to discipline attorneys who appear before it." Id.(quoting Ex parte Burr, 9 Wheat. 529, 531 (1824)). Included
among the types of sanctionable conduct discussed by Chambers are
those cases where
a party has "'acted in bad faith, vexatiously,
wantonly, or for oppressive reasons.'" . . . The
imposition of sanctions in this instance transcends a
court's equitable power concerning relations between
the parties and reaches a court's inherent power to
police itself, thus serving the dual purpose of
"vindicat[ing] judicial authority without resort to the
more drastic sanctions available for contempt of court
and mak[ing] the prevailing party whole for expenses
caused by his opponent's obstinacy."
Id. at 45-46 (internal citations and quotations omitted). See
also Gillette Foods Inc. v. Bayernwald-Fruchteverwertung, 977
F.2d 809, 813 (3d Cir. 1992) (quoting Chambers). "Because of
their very potency," however, the federal courts must be careful
to exercise their inherent powers "with restraint and
discretion." Chambers, 501 U.S. at 44. "A primary aspect of
that discretion is the ability to fashion an appropriate sanction
for conduct which abuses the judicial process." Id. at 44-45.
In this case, the bankruptcy court determined that denying FE&B's
entire fees application constituted an appropriate sanction.
We first note here that the advent of Rule 11 and the other
statutory sanctions did not eviscerate the courts' inherent power
to sanction: "[W]hereas each of the other mechanisms 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 in the
interstices." Id. at 46. Moreover, we have previously rejected
the proposition "that once a claim is held not to violate Rule
11, the court is prevented from imposing sanctions under its
inherent power." Gillette Foods, 977 F.2d at 813.
Against this backdrop, FE&B challenges the bankruptcy
court's exercise of its inherent sanction power on two main
grounds. First, FE&B argues that this result deprives FE&B of
due process because the bankruptcy court indicated that it was
exclusively acting pursuant to Rule 11 and Bankruptcy Rule 9011.
Second, FE&B argues on the merits that the record is insufficient
to support the finding that it acted in bad faith during the
course of its representation of the Debtor.
1. Due Process
The key to FE&B's due process claim is the distinction
between Rule 11 sanctions and inherent power sanctions--if these
sanctions were identical in all respects, particularized notice
as to one sanction would arguably suffice to fully inform FE&B as
to the pendency of the other sanction. Rule 11 sanctions and
inherent power sanctions do, of course, differ markedly in at
least one aspect pertinent to this case: Invocation of a federal
court's inherent power to sanction requires a finding of bad
faith. Chambers, 501 U.S. at 49; Landon v. Hunt, 938 F.2d 450,
454 (3d Cir. 1991). The imposition of Rule 11 sanctions, on the
other hand, requires only a showing of objectively unreasonable
conduct. E.g., Lony v. E.I. Du Pont de Nemours & Co., 935 F.2d
604, 616 (3d Cir. 1991).
We have previously held that "[p]rior to sanctioning an
attorney, a court must provide the party to be sanctioned with
notice of and some opportunity to respond to the charges" in
order to satisfy the requirements of due process. Jones v.
Pittsburgh Nat'l Corp., 899 F.2d 1350, 1357 (3d Cir. 1990)
(citations omitted). Moreover, we have stated that "we think
particularized notice is required to comport with due process."
Id. (citation omitted). FE&B has raised a fairly significant
argument here as the bankruptcy court never indicated that it was
acting under its inherent sanction power in this case. Indeed,
neither the motion for sanctions nor the bankruptcy court ever
mentioned any ground for sanctions other than Rule 11 and
Bankruptcy Rule 9011. As discussed above, it was the district
court that first justified the bankruptcy court's conduct on the
ground of the inherent power to sanction. Nonetheless, we agree
with the district court's reasoning and we likewise find that
justifying the bankruptcy court's conduct on that ground does not
violate FE&B's right to due process on the record of this case.
We do not intend to disturb the line of case law cited to by
FE&B in its brief. See Simmerman v. Corino, 27 F.3d 58, 64 (3d
Cir. 1994); Landon, 938 F.2d at 454; Jones, 899 F.2d at 1357-58;
Gagliardi v. McWilliams, 834 F.2d 81, 83 (3d Cir. 1987);
Eavenson, Auchmuty & Greenwald, 775 F.2d at 540-41; Eash v.
Riggins Trucking Inc., 757 F.2d 557, 570-71 (3d Cir. 1985).
Rather, our holding is a narrow one, compelled by our finding
that FE&B was provided with sufficient, advance notice of exactly
which conduct was alleged to be sanctionable and, furthermore,
that FE&B was aware that it stood accused of having acted in bad
faith.
(a) Particularized Notice
In Jones we stated that the reason behind the particularized
notice requirement was to put "a party . . . on notice as to the
particular factors that he must address if he is to avoid
sanctions." Jones, 899 F.2d at 1357. Generally speaking,
particularized notice will usually require notice of the precise
sanctioning tool that the court intends to employ. In Jones, as
was the case here, the sanctioned attorney was initially informed
that only Rule 11 sanctions were being considered. Id. Only
when the sanctioned attorney received the district court's order
was he informed that sanctions were also being imposed pursuant
to 28 U.S.C. § 1927,7 which has been interpreted to require a
finding of bad faith conduct. Id. On appeal, we vacated the
imposition of sanctions under § 1927 because the sanctioned
7
§ 1927. Counsel's liability for excessive costs
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.
attorney had not been provided with sufficient notice that his
subjective bad faith was in question.8
The situation confronting the sanctioned attorney in Jones
is to be contrasted with the situation facing FE&B: First, the
sanction motion filed by Mr. Fustine, the Knox firm, and the
Committee explicitly charges FE&B with bad faith in the filing of
the complaint on behalf of the debtor. Specifically, the
8
The motion for sanctions filed by the sanctioned
attorney's opponents pursuant to Rule 11 was hinged primarily
upon procedural noncompliance: "[The motion] alleged that
plaintiff had failed to file a pre-trial statement, to submit a
RICO case statement, to answer interrogatories, to produce
documents requested and to conduct any discovery and that
plaintiff had had no factual basis for the RICO count." Id. at
1353. This request for sanctions was reiterated on at least two
occasions, but again these requests were insufficient to put the
attorney on notice of the fact that he stood accused of having
acted in subjective bad faith: The first reiteration "recited
that it sought dismissal and fees based upon plaintiff's 'conduct
of [the] litigation in general,' including the failure to answer
interrogatories, failure to file a RICO case statement or pre-
trial statement and failure to produce requested documents." Id.
at 1354.
The sanctioned attorney's answer to his opponent's motion
for counsel fees--which constituted his sole opportunity to
respond to the question of sanctions--was insufficient to
demonstrate that he was on notice that he stood accused of more
than objectively unreasonable conduct. His response merely
repeated the requirements of Rule 11:
In response to the charge of having violated Rule 11,
appellant asserted that he "believed throughout a large
portion of the instant litigation . . . that the
Complaint was warranted by existing law; that,
alternatively, it was warranted by good faith arguments
for extension, modification or reversal of existing
laws; and that it was not interposed for delay or
needless increase in cost of litigation."
Id.
sanction motion charges that FE&B was actually aware of, or had
at least remained deliberately indifferent to, the factual and
legal baselessness of the complaint.
Second, and much more importantly, the bankruptcy court also
made it clear that it suspected FE&B of having acted in bad faith
both in its representation of the debtor's interests and in the
filing of the complaint. At the conclusion of the August 3, 1993
hearing on the Debtor's complaint, after Mr. Fellheimer had
sought to withdraw the complaint, the bankruptcy court first
stated that it believed that FE&B was representing the interests
of Mr. Burke over the interests of the Debtor: "[Y]ou're on a
knife's edge, Mr. Fellheimer. You're representing Mr. Burke . .
. . And that's adverse to the interests of the [Debtor]. . . .
[T]o the extent that you represent [Mr. Burke] to the detriment
of the [Debtor] and the creditors, you're violating your
fiduciary duty to the [Debtor]." The bankruptcy court then
stated its belief that FE&B had filed the complaint in bad faith:
"[F]or Mr. Burke to get upset because the creditors committee
thinks that he's incompetent, is unfortunate. You . . . have to
tone him down. You can't file this kind of lawsuit that you
filed here just because Mr. Burke is upset. That's ridiculous. .
. . [T]his whole litigation is a lot of nonsense." The
bankruptcy court even indicated the nature of the sanction that
it was considering: "[Y]ou're representing [Mr. Burke]
individually and you're risking whatever fee you might get out of
this."
If the bankruptcy court had then and there conducted a
hearing on the sanction motion, FE&B would arguably possess a
stronger due process argument--this is the key factor which
distinguishes this case from Jones. In Jones, the record was
insufficient to demonstrate that the sanctioned attorney had
advance notice that the sanctioning court was contemplating the
imposition of sanctions which hinged upon a finding of bad faith.
In this case, FE&B had over eleven weeks once it had learned of
the bankruptcy court's leanings on this matter--until October 20,
1993--to prepare for the hearing on the sanctions motion. In the
words of our Jones opinion, we can say "with reasonable assurance
on this record" that FE&B was "on notice as to the particular
factors that [it had to] address if [it was] to avoid sanctions."
Jones, 899 F.2d at 1357. Furthermore, it appears evident from
Mr. Fellheimer's soliloquy at the October 20, 1993 hearing that
he was fully aware of what he and FE&B were up against:
I have been searching in vain for a way to stop it
or to get away from it. I want to tell the Court. I
don't want this Court to think that I'm standing here,
that I believe what happened was right. I believe it
was wrong. If I had it to do over again, I would do it
differently. And I can promise you, whatever you
decide to do, it won't happen again. I would approach
it differently and I would make sure my firm approaches
it differently. I'm very unhappy with the way it came
out. I will tell you that there were a lot better ways
to resolve that problem than the one we selected. And
I want to acknowledge that to you and admit that to
Your Honor and admit to Your Honor that the result was
bad. For that I apologize.
. . . .
. . . I would like to step aside. Whatever I'm to
pay, I'll pay. Whatever fee I'm paid, I'll take, and
step aside in the interest of all. I don't think it's
good for this to just go on and on. It doesn't
accomplish anything for this debtor. . . .
. . . .
And I want to publicly say to Guy Fustine in the
courtroom, I think we were wrong in filing the
Complaint. And maybe I'm handing it to Mr. Lanzillo.
And I will, if that's what it is. I apologize to you
publicly. I think we got carried away with the problem
and we went too far, and for that I apologize. And
whatever the Court decides to do, I will accept.
Therefore, we hold that the record adequately demonstrates
that FE&B was sufficiently on notice that it faced allegations of
having acted in subjective bad faith.
(b) Opportunity to be Heard
The requirements of due process also require a meaningful
opportunity to be heard. See, e.g., Simmerman, 27 F.3d at 64.
This requirement is especially important in cases such as this
where a law firm's reputation is at stake:
Sanctions are not to be assessed without full and
fair consideration by the court. They often entail a
fine which may have more than a token effect upon an
attorney's resources. More importantly, they act as a
symbolic statement about the quality and integrity of
an attorney's work--a statement which may have tangible
effect upon the attorney's career.
Id. As discussed above, once the bankruptcy court had made its
position regarding FE&B's conduct clear, FE&B had over eleven
weeks before the hearing to further brief the issue. FE&B was
then afforded ample opportunity to be heard at the hearing
itself--the transcript of the October 20, 1993 hearing stretches
on for 321 pages. Based on this record, we cannot find that FE&B
was denied a meaningful opportunity to be heard.
(c) Conclusion
Ideally, there would have been some explicit indication here
that the bankruptcy court was acting pursuant to its inherent
sanction power. We refuse, however, to go along with FE&B's
argument and overturn the bankruptcy court's decision merely
because that court applied the wrong label to the righteous use
of its inherent sanction power. See Brown v. Allen, 344 U.S.
443, 459 (1953) (citations omitted). We do not expect, however,
that the result reached here will be often justified in future
cases where the sanctioned party was not explicitly informed
beforehand of the precise ground for the imposition of sanctions.
To summarize, our finding here was primarily driven by (1) the
bankruptcy court's clear warning to FE&B eleven weeks prior to
the hearing on the sanctions; and (2) the evidence pertaining to
FE&B's actual awareness of the nature of the charges pending
against it, such as Mr. Fellheimer's statements at the October
20, 1993 hearing.
2. Sanctions Under the Court's Inherent Power
FE&B also argues on the merits that the record is
insufficient to support a finding of bad faith. As discussed
above, a finding of bad faith is required to support a court's
employment of its inherent sanction power. Chambers, 501 U.S. at
49 (citations omitted).
We first note that, contrary to FE&B's assertions, the
bankruptcy court did find that FE&B had acted in bad faith in the
course of its representation of the debtor:
The conclusion is inescapable that the purpose of the
Complaint was to separate the Committee from its chosen
counsel due to the fact that counsel for the Committee
was advocating the Committee's position that it would
be appropriate to remove Burke from upper-level
management.
. . . Fellheimer . . . abandoned his fiduciary
obligations as counsel to the Debtor corporation and .
. . undert[ook] representation of Burke, individually.
As Burke's attorney in such circumstances, he was
hostile to the Debtor corporation and its creditors.
. . . .
In short, Fellheimer filed a lawsuit against the
attorneys for the Creditors' Committee seeking $4.25
million in damages for the sole purpose of protecting
his real client, Burke, from the legitimate actions of
the Creditors' Committee in opposing Burke's management
of the Debtor's business. . . . Viewed in this light,
the actions of Fellheimer as an officer of the Court in
violating his fiduciary duties and in bringing such an
action are absolutely not to be condoned. We view it
as a disgrace to the legal community which we otherwise
hold in high regard.
We further conclude that Fellheimer never had any
intent to proceed with a trial on the merits of this
complaint. He knew when he filed the Complaint that
the allegations were unsupported. His scheme was to
file the Complaint, demand the $4.25 million from the
Creditors' Committee counsel, and then delay a hearing
on the merits while he used the lawsuit as a wedge to
intimidate the Creditors' Committee and its counsel in
his negotiations with it for the benefit of Burke.
Charter Techs., 160 B.R. at 931. We may not disturb these
findings, nor may we disturb the bankruptcy court's preliminary
findings which led up to them, unless we first find that they are
clearly erroneous. Brown, 851 F.2d at 84. Since FE&B offers
nothing but tepid contradictions in rebuttal, we must affirm the
bankruptcy court's findings, which are sufficient to support its
conclusion that FE&B did act with bad faith in the proceedings
below.
Second, we take note of the Supreme Court's cautionary
language in Chambers:
[W]hen 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.
Chambers, 501 U.S. at 50. In this case, only Mr. Eichen of FE&B
could be properly sanctioned under the versions of Rule 11 and
Bankruptcy Rule 9011 then in effect as only Mr. Eichen actually
signed the complaint. It is evident, however, that the
bankruptcy court imposed firm-wide sanctions because it felt that
other attorneys at FE&B, particularly Mr. Fellheimer, were
primarily responsible for the sanctionable conduct.9 Indeed, Mr.
Fellheimer himself testified as to his primary role in the filing
of the complaint at the October 20, 1993 hearing: "Your Honor
told me what he thought of [the complaint] at the time when we
withdrew it. And I bear full responsibility for it, Your Honor."
We cannot conclude, after reviewing this record, that the
bankruptcy court abused its discretion by employing its inherent
power to sanction the entire firm of FE&B.
B. Denial of Fees Under 11 U.S.C. § 328(c)
9
We have previously recognized that a court may employ its
inherent sanction power to reach attorneys who did not personally
sign the document in question. See Gillette Foods, 977 F.2d at
813.
We also find that the denial of FE&B's fees application may
be upheld as a proper exercise of the bankruptcy court's
authority under 11 U.S.C. § 328(c). Section 328(c) authorizes
the bankruptcy court, in its discretion, to deny a professional
person's request for fees if that person "represents or holds an
interest adverse to the interest of the estate with respect to
the matter on which such professional person is employed." While
it is true that the bankruptcy court did not indicate that it was
acting pursuant to § 328(c), the bankruptcy court did explicitly
find that FE&B had represented the interests of Mr. Burke, which
were adverse to the Debtor's interests: "Fellheimer . . .
abandoned his fiduciary obligations as counsel to the Debtor
corporation and . . . undert[ook] representation of Burke,
individually. As Burke's attorney in such circumstances, he was
hostile to the Debtor corporation and its creditors." Charter
Techs., 160 B.R. at 931. Having already concluded that the
bankruptcy court's underlying factual findings in this regard are
not clearly erroneous, we find that the denial of FE&B's fees
application may be upheld as an exercise of the bankruptcy
court's authority under § 328(c).
In light of our finding that the denial of FE&B's fees
application may be upheld as a proper exercise of the bankruptcy
court's inherent sanction power, and that the sanctions may
alternatively be upheld under 11 U.S.C. § 328(c), we need not
address the third ground provided by the district court for
upholding the sanctions--namely, that FE&B waived its right to
contest the imposition of sanctions. In this regard, we note
only that we would require a fairly persuasive showing that FE&B
had waived the right to contest a matter as important as Rule 11
sanctions, given the effect that such sanctions may have upon a
law firm's primary stock in trade--its reputation.
C. Amount of the Sanction
As discussed above, the bankruptcy court sanctioned FE&B by
denying FE&B's entire fees application, except for $15,000 for
reimbursement of expenses. In its initial brief before this
court, FE&B claims that the total amount of compensation due to
it amounts to approximately $260,000. This figure represents
$167,246.50 allegedly accrued from January 20, 1993, through
August 21, 1993,10 plus $92,169 which allegedly accrued from
August 22, 1993, through December 15, 1993. As the district
court noted, however, there is nothing in the record to indicate
that FE&B ever submitted a fees application to the bankruptcy
court for this latter time period. Therefore, FE&B's claim for
fees for this latter time period is not properly before this
court. Thus, our review of the bankruptcy court's denial of
FE&B's fees application reaches only the amount attributable to
the period before August 22, 1993: $167,246.50. Needless to
say, absent the sanction, FE&B would not necessarily have
received even this reduced amount: The Committee, for example,
10
FE&B had attempted to appease the bankruptcy court by
"sanctioning itself" for the filing of the complaint. FE&B had
accordingly subtracted $33,029--the amount attributable to the
filing of the complaint--from its original request of $200,275.50
for this time period.
had hotly contested FE&B's hourly rates as they exceeded those
normally charged in that area.
FE&B contests the bankruptcy court's decision to deny its
entire fees application on the ground that it did perform at
least some services of value to the Debtor. Assuming arguendo
that FE&B has performed services of value to the Debtor, we
nonetheless uphold the sanctions in their entirety.
The bankruptcy court justified its decision to deny FE&B's
entire fees application as follows: "[A]ny fees to be collected
by [Fellheimer] shall be collected from his real client, Burke. .
. . Fellheimer's inappropriate conduct affected and continues to
affect this entire case. Both the Debtor and its counsel have
exhibited conduct of dishonesty, incompetency and gross
mismanagement of the affairs of the Debtor." Charter Techs., 160
B.R. at 932-33. Based on the extensive record of wrongdoing
documented by the bankruptcy court, which we have already upheld,
we cannot find this result to be clearly erroneous. Accordingly,
we must affirm the denial of FE&B's entire fees application.
V. CONCLUSION
For all of the foregoing reasons, the decision of the
district court upholding the decision of the bankruptcy court is
affirmed.
Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies,
Inc., d/b/a Elgin Electronics; Knox, McLaughlin, Gornall &
Sennett, P.C.; and Guy C. Fustine, Esquire, No. 94-3461.
BECKER, Circuit Judge, concurring and dissenting.
The majority opinion is quite powerful and thorough, and
almost entirely convincing. It would have my full joinder were
the sanction it approves not so very large -- on this record it
could apparently amount to more than $167,000. I cannot conceive
that we would approve a sanction which required FE&B to actually
pay anywhere near that amount under the facts of this case.
While I acknowledge that we deal here with deprivation of a fee
rather than an ordinary out-of-pocket payment, that difference is
not, to me, of great legal significance. Accordingly, while I
agree with the majority that the bankruptcy court was warranted
in assessing a sanction against FE&B, and concur in the
majority’s opinion to that extent, I believe the court abused its
discretion if in fact the sanction imposed was as high as
$167,000 (the fees requested by FE&B), given the nature of the
conduct involved.
I do not attempt to put a much different cast than does the
majority on FE&B's offending conduct (though I think the question
whether it was conflicted between its apparent representation of
Mr. Burke and the debtor to be far closer than does the
majority).11 My position is instead impelled by the fact that I
11
In my view, FE&B could have reasonably concluded that
successful reorganization of the debtor hinged on the retention
of Mr. Burke. Nevertheless, I cannot say that the bankruptcy
court's finding of a conflict was clearly erroneous.
find the opinions of the bankruptcy court, the district court,
and the majority to be either silent or unconvincing on one of
the most critical aspects of the decision to deny FE&B its fees -
- the contribution vel non of FE&B to the reorganization. The
record is not sufficiently developed as to this point and I
suspect that the efforts of FE&B had far more to do with the
ultimately successful reorganization, albeit sans Mr. Burke, than
their adversaries admit or the other reviewing judges in this
case apparently believe. Moreover, the bankruptcy court's
apparent finding that FE&B demonstrated "incompetency and gross
mismanagement of the affairs of the debtor," is, in my view,
unsupported on the record and clearly erroneous. Indeed, the
majority's affirmance of that finding is wholly conclusory.
I agree that the filing of the lawsuit against the Knox firm was
outrageous.12 I also agree that the bankruptcy court’s finding
of a conflict by FE&B and Mr. Fellheimer's temporizing about the
availability of Mr. Burke justify a large sanction. But, in view
of the totality of circumstances, I cannot agree that the
bankruptcy court could be justified in imposing a sanction
anywhere near as high as $167,000, even given our deferential
review. Accordingly, I would vacate the challenged order, remand
the case to the bankruptcy court for a finding as to the value of
FE&B’s fee absent sanction, and then permit the court to take
12
I say this even though it is not as clear to me as it is
to the majority that FE&B lacked a colorable basis, at least at
one point, to allege a conflict in the Knox firm's
representation.
another look at the matter and appropriately reduce that award,
pursuant to its inherent authority,13 as a sanction for FE&B’s
conduct. To this extent, I respectfully dissent.
13
The majority also rests its decision on the bankruptcy
court’s power to deny fees under 11 U.S.C.A. § 328(c) (1993),
which provides that "the court may deny allowance of compensation
for services . . . if, at any time . . . such professional person
is not a disinterested person, or represents or holds an interest
adverse to the interest of the estate with respect to the matter
on which such professional person is employed." While this
section might have justified a complete denial of FE&B’s fees in
this case, I cannot join in affirming this sanction as a proper
exercise of the bankruptcy court’s discretion under § 328(c),
since, as the majority recognizes the bankruptcy court did not
rely on § 328(c) in imposing this sanction on FE&B.