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In
re Collins 250
B.R. 645 Bkrtcy.N.D.Ill.,2000.
July 19, 2000. After dismissal of Chapter 7 case as a bad
faith filing, creditor Lloyd's moved for sanctions on debtor and his attorneys.
The Bankruptcy Court held that: (1) sanctions would be imposed on both Chapter
7 debtor and his attorneys. and (2) sanctions were also warranted under
Bankruptcy Rule 9011 against both debtor and his attorneys on the ground that
petition was filed for improper purpose [*649] COUNSEL:
Theodore W. Grippo, Jr., Pembroke & Brown, Park Ridge, IL, for Patrick J.
Collins. Leon E. Lindenbaum, Kurlander & Brisky, Ltd., Chicago, IL, for
Lindenbaum Coffman. MEMORANDUM OPINION JUDGE: ERWIN I.
KATZ, Bankruptcy Judge. This matter comes before the Court on the
motion of the Society of Lloyd’s
(“Lloyd’s”) for sanctions against Patrick J. Collins
(“Collins”), a debtor under Chapter 7 of the United States
Bankruptcy Code, 11 U.S.C. § 101 et seq. (hereinafter the
“Bankruptcy Code”), and his attorneys Whitman H. Brisky
(“Brisky”) and the firm Lindenbaum, Coffman, Kurlander &
Brisky (the “Firm”). Following the dismissal of
Collins’ bankruptcy petition as a bad faith filing under 11 U.S.C.
§ 707(a), Lloyd’s seeks an award of costs and
attorneys fees, in the amount of $133,107.09, incurred by it in contesting
Collins’ bankruptcy case. In addition, Lloyd’s seeks amounts
equal to those paid to the Chapter 7 trustee (the “Trustee”)
and the Trustee’s counsel, as well as those paid or owing to Brisky
and the Firm. Lloyd’s argues that by filing for bankruptcy, Collins
has depleted the assets available to pay his debt to Lloyd’s.
Lloyd’s moves for sanctions under 11 U.S.C. §
105(a) and under Federal Rule of Bankruptcy Procedure 9011. For the reasons
that follow, the Court finds that sanctions should be imposed upon both Collins
and his attorneys. JURISDICTION The Court has jurisdiction over this matter
pursuant to 28 U.S.C. § 157(b)(1) and 28 U.S.C.
§ 1334. This matter arises [*650]
both under title 11 and in a case under title 11. Venue lies under 28 U.S.C.
§ 1409. BACKGROUND Collins has been a life insurance agent for
the past 34 years. He owns and operates his own agency. He has been successful
in his business, accumulating assets worth more than $2.3 million. This case arises entirely out of
Collins’ relationship with Lloyd’s and his attempts to avoid
the allegedly unwarranted consequences of that relationship. The many issues
between Collins and Lloyd’s are not before this Court, and this Court
expresses no opinion about the merits of the claims of either side in their
ongoing battle. However, that battle is the raison d’etre for the
bankruptcy case and the many additional months of litigation it has created.
The Relationship Between Collins and Lloyd’s The Society of
Lloyd’s operates and regulates Lloyd’s of London, the British
insurance market that began as a marine insurer over 300 years ago and has now
insured everything from Betty Grable’s “million dollar
legs” to natural disasters and asbestos disease. Unlike traditional
American insurance companies, Lloyd’s does not directly insure its
customers solely with its assets, nor does it earn profits from premiums and
pay claims for losses to insureds under its policies. Rather, through
individuals known as Members’ Agents, Lloyd’s solicits
individuals of substantial means to become Names or underwriters. Often, these
Names form groups known as Syndicates to insure large risks. When an individual
becomes a Lloyd’s Name, that individual agrees to put his entire net
worth at risk to meet the claims that may be made against him or his Syndicate.
In exchange, the Names expect to profit from the premiums paid by the
policy-holders and from investment of the Syndicate’s capital. The
obvious hope is that no policy holder will make a claim and that the Names will
reap handsome profits from their investments. Collins was a Lloyd’s
Name for the years 1988 through 1991. Collins has testified that he never made
any profits on his investment in Lloyd’s and that “[a]ll [he]
ever did was send them money.” (April 11, 2000 11:00 a.m. Transcript
at 40:23-24) (hereinafter “Tr. 1”). Collins paid
Lloyd’s approximately $275,000 in underwriting losses during the years
that he was a Name. These losses resulted from Lloyd’s reinsurance of
claims such as those for asbestosis, natural disasters, and environmental
damage, which may surface, in huge amounts, years after a Syndicate underwrites
the policy. See The Society of Lloyd’s v. Ashenden,
No. 98 C 5335, 1999 WL 284775 at *1-4 (N.D.Ill. April 23, 1999) (“Ashenden
II “); David McClintick, The Decline and Fall of
Lloyd’s of London, TIME INTERNATIONAL, February 21, 2000, at 32
(providing a detailed history of Lloyd’s losses since the year 1980
and a description of the problems it and its Names currently face). In 1996,
Lloyd’s offered its investors a settlement proposal entitled
“Reconstruction and Renewal” (the “R &
R”). In the R & R, Lloyd’s created a reinsurance company
known as Equitas to assume responsibility for all pre-1993 liabilities. The
Names were required to pay a premium for the Equitas reinsurance.
Lloyd’s also agreed to settle all outstanding pre-1993 liabilities for
a reduced amount if the Names would waive all claims against it. Under English
law, Lloyd’s was able to accept the R & R on behalf of all the
Names concerned and require the Names to pay instantly, even if they intended
to sue to reject the R & R. Collins did not consent to the R & R and
has not paid the Equitas premium or any other amounts owed to Lloyd’s
under the R & R. Collins alleges that the Equitas reinsurance is not
sufficient to protect him and the other Names from potentially enormous claims
arising from pre-1993 liabilities. [*651]
However, no claims have actually been made. Collins alleges that
Lloyd’s fraudulently induced him to become a Name and has attempted to
sue Lloyd’s or related entities in both the United States and England.
The United States District Court for the Northern District of Illinois (the
“District Court”) dismissed his securities fraud suit for
improper venue based on a forum selection clause in his contracts with
Lloyd’s. Ashenden et al. v. Lloyd’s of London,
No. 96 C 852, 1996 WL 717464 (N.D.Ill. December 9, 1996) (“Ashenden
I“). An English court awarded Collins
approximately £170,000 in suits against two
Lloyd’s Members Agents, but Lloyd’s claimed the money for the
benefit of policyholders pursuant to one of its by-laws. Collins has asked that
the funds be applied to his debt to Lloyd’s, but Lloyd’s will
not agree to do this. The disposition of the funds is the subject of litigation
in England. Collins is a member of a group that litigates against
Lloyd’s and related entities. He is also a member of a class action
against Lloyd’s and related entities including Citibank and the law
firms LeBoeuf, Lamb, Greene & McCrae, Mendes & Mount, and Lord, Bissell
& Brook. He has testified that other than the lawsuits discussed herein, he
individually has no current pending litigation against Lloyd’s.
Lloyd’s has successfully sued Collins. On March 11, 1998, an English
court entered a judgment against him in the amount of £271,856.76
(approximately $433,000) for amounts owed under the R & R (the
“English Judgment”). Post-judgment interest has been accruing
on the debt, so that it now amounts to approximately $525,000. In order to enforce
its judgments, on April 22, 1999, Lloyd’s filed for Registrations of
Foreign Money Judgments (the “Registrations”) in the District
Court against Collins and sixteen other American Names against whom English
judgments had been entered. Collins and several of his fellow Names attempted
to resist the Registrations in The Society of Lloyd’s v. Berkos et
al., No. 99 C 2651. On September 16, 1999, United States
District Judge Harry D. Leinenweber entered an order setting October 29, 1999
as the ruling date in the Berkos case. On October 14,
1999, Collins filed his bankruptcy petition. On October 29, 1999, the District
Court entered an order in Berkos recognizing the English judgments (the
“Berkos Judgment”). Id. On November 16,
1999, the District Court entered final judgment against twelve other Berkos
defendants. Those twelve filed a notice of appeal that same day. The appeal is
currently pending in the United States Court of Appeals for the Seventh
Circuit. The Collins Bankruptcy Filing Collins testified that he first considered a
bankruptcy filing following the April 23, 1999 decision in Ashenden II, which
recognized English judgments against two other Lloyd’s Names. Brisky
advised him to file the bankruptcy petition either before the District Court
announced its judgment in Berkos or after any appeal in
Berkos. He filed just two weeks before the District Court’s decision
in Berkos because he anticipated losing and was anxious to “get it
behind him” (Tr. 1 at 38:20) (hereinafter “Tr. 1”),
to “end the nightmare” (Tr. 1 at 38:8), to “get
finality” (Tr. 1 at 40:1-2), and to “get Lloyd’s off
his back” (Tr. 1 at 40:7-8). He wanted to “end all of the
struggling” (Tr. 1 at 40:2) and to “go on with [his]
life” (Tr. 1 at 40:4). Lloyd’s promptly moved to modify the
automatic stay imposed by 11 U.S.C. § 362 so that the action
in the District Court could proceed against Collins. Collins objected to the
Lloyd’s motion. On December 21, 1999, the Court modified the stay to
allow Lloyd’s to proceed in the Berkos case for a ruling on any
pending motions and any appeal therefrom. The District Court entered judgment
against Collins on February 8, 2000. Collins filed his notice of appeal on
February 9, 2000. [*652] On December 30,
1999, Lloyd’s filed a motion to dismiss Collins’ petition as
a bad faith filing under 11 U.S.C. § 707(a). After trial on
the merits, this Court entered a judgment finding that Collins filed the
petition in bad faith and dismissing his case under § 707(a).
On May 4, 2000, following the dismissal of Collins’ bankruptcy case,
the District Court approved his supersedeas bond for the Berkos appeal in the
amount of $300,000. Collins’ Debts At the time of his bankruptcy filing, Collins
had only three creditors: the Harris Bank (“Harris”), the
Northern Trust Bank (the “Northern Trust”), and
Lloyd’s. The debts to Harris and the Northern Trust were each secured.
The debt to Harris was secured by a lien on the renewals of life insurance
policies sold by Collins; the debt to the Northern Trust was secured by real
property. Collins was making timely payments on those debts without difficulty
and reaffirmed those debts upon filing his bankruptcy petition. Collins
admitted both in his filings with the Court and in his testimony before the
Court that he filed this Chapter 7 case solely to free himself of
Lloyd’s. The only debt that Lloyd’s actively
seeks to collect is the English Judgment, which now amounts to approximately
$525,000. This debt represents the amount that Lloyd’s paid to Equitas
on Collins’ behalf, plus interest accrued to date. Collins alleges that
he may be additionally liable for some unknown amounts at some unknown future
time if some unknown potential claimant seeks relief beyond what Equitas can
pay. However, Collins has never been asked to pay a penny on any claim of this
type and there is no present indication that he will be asked to pay. In 1992 or 1993, Collins joined the American
Names Association (the “ANA”), a group of Lloyd’s
Names who are also embroiled in litigation with Lloyd’s, or at least
very unhappy with the outcome of their investments with Lloyd’s. The
ANA’s membership is now made up only of those Names who have refused
to accept the R & R. The ANA’s original purpose was to gather
information about Lloyd’s and to develop tactics to defend against
Lloyd’s. Now, its primary purpose is to “defend its members
against attacks by Lloyd’s.” (Tr. 2 at 17:21-22). The ANA has
accumulated and disseminated information on the bankruptcy process to its
Names. Collins has been a director of the ANA since 1996. Collins’ Assets At the time of filing, Collins held about
$75,000 in non-exempt assets, which became part of the bankruptcy estate.
Collins holds approximately $2.3 million in exempt assets such as life
insurance policies, pension plans and other retirement plans. He also owns a
home in joint tenancy with his wife, which he values at $490,000. This home is
the security for the $400,000 debt to the Northern Trust, which Collins has
reaffirmed. Collins testified that he would he would use
his exempt assets to pay the debts to Harris and the Northern Trust, stating
that “[t]hose are debts I honestly owe and I would see that they are
paid.” (Tr. 2 at 37:3-4). He testified that using exempt assets to pay
Lloyd’s would cause him financial distress. Collins’ Income Collins earned net income in excess of
$200,000 in the year 1999. He stated in open court that he earned substantially
less in 1999 than in prior years, because he was preoccupied with his Lloyd’s
litigation. He has stated that he will stop working if he does not receive
Chapter 7 relief. In addition to income from his business, Collins receives
monthly payments from Social Security and several pensions in the approximate
total amount of $5,000 to $6,000 per month, all of which is exempt from
creditors. [*653] Collins’
Expenses Collins has represented to the Court that he
spends $975 per month on repairs to his home. He spends $930 per month on food
and $800 per month on clothing. For recreation, clubs, and entertainment, he
spends $1,780 per month. His total monthly expenses, including other scheduled
items, add up to $11,525.65. Collins pays about $7,500 per year in life
insurance premiums that are gifts to his grandchildren. He pays about $30,000
per year in life insurance premiums for himself. He annually takes his entire family,
including his five children, the youngest of whom is thirtyfive, and their
spouses and his twenty grandchildren, on vacation. He pays the entire bill. He
takes additional vacations with his wife and sometimes includes other family
members. He pays the bills for these vacations. Over the past year, these
vacations have cost at least $13,000. In October 1999, the same month in which
his filed his bankruptcy petition, Collins took a trip to Mexico on which he
spent $5,000. Shortly thereafter, and during the pendency of his bankruptcy
case, Collins took several members of his family on a ski trip to Snowmass,
Colorado. He paid the bill. Last year, Collins made $30,000 in charitable
donations. He expects to make larger donations this year. He also gives each of his children $1,000 at
Christmastime every year. He has stated in his filings and in his testimony
before the Court that he seeks Chapter 7 relief so that he will not have to
change this lifestyle. He has stated that to him “financial
distress” means having to give up these things, which he would rather
not do, to pay his bills (April 11, 2000 2:00 p.m. Transcript at 70:10-13)
(hereinafter “Tr. 2”). “Financial distress”
to Collins also includes having to use his exempt assets to pay his bills.
Dismissal as a Bad Faith Filing [FN1] FN1. While this section contains a discussion of the law, it is not to be read as the holding of this opinion. It is merely a recitation of the facts of the hearing on April 11-12, 2000, including the outcome of that hearing, an oral ruling dismissing Collins’ case as a bad faith filing followed by the written Judgment Order docketed on April 18, 2000. Collins voluntarily dismissed his appeal of that ruling. The facts recited in this section are necessary to the holding of this opinion-that both Collins and his lawyers should be sanctioned for filing the bankruptcy petition. On April 12, 2000, following a two-day trial, this Court dismissed Collins’ bankruptcy petition as a bad faith filing under § 707(a) of the Bankruptcy Code based on the foregoing facts. Section 707(a) permits a court to dismiss a case “for cause” after notice and a hearing. 11 U.S.C. § 707(a). Bad faith can constitute cause for dismissal under § 707(a). Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F.3d 829, 831 (8th Cir.1994); Green v. Staples (In re Green), 934 F.2d 568, 572 (4th Cir.1991); Industrial Insurance Services v. Zick (In re Zick), 931 F.2d 1124, 1126-27 (6th Cir.1991). Although the Seventh Circuit has never
addressed the issue of dismissal for cause under § 707(a),
this Court concluded that the appropriate test for dismissal pursuant to
§ 707(a) is the “mainstream” totality of
the circumstances test employed in other Circuits for dismissal under both
§ 707(a) and § 707(b). See Kornfield v.
Schwartz (In re Kornfield), 164 F.3d 778, 783 (2d
Cir.1999) (applying the “mainstream” description to the
totality of the circumstances test); see also, Stewart v. U.S. Trustee (In
re Stewart), 175 F.3d 796, 810 (10th Cir.1999) (adopting
the totality of the circumstances test in which the debtor’s ability
to pay his debts is the primary factor and other factors should be considered
on a case by case basis); First USA v. Lamanna (In re Lamanna),
153 F.3d 1, 4 (1st Cir.1998) (adopting totality of the circumstances as the
test by which to determine substantial abuse under § 707(b),
but stating that a debtor’s ability to pay [*654]
may by itself warrant dismissal under the proper circumstances); Green, 934
F.2d at 572 (rejecting the “per se” rule, which requires
dismissal under § 707(b) if a debtor can meet his debts as
they come due, and adopting the totality of the circumstances test under which
courts evaluate on a case by case basis); Zick,
931 F.2d at 1128-30 (approving the bankruptcy court’s consideration of
multiple factors in dismissing a case under § 707(a) and
declaring that courts must undertake bad faith dismissals on an ad hoc basis).
Most, but not all, of the published opinions discussing the totality of the
circumstances test involve motions to dismiss under § 707(b).
Lloyd’s filed its motion to dismiss Collins’ case under
§ 707(a). Section 707(b) differs from
§ 707(a) several respects. First, only the court or the UST
may bring motions under § 707(b). Under
§ 707(b), the debtor’s debts must be primarily
consumer debts. To dismiss a case under § 707(b), a court
must find that granting Chapter 7 relief to the debtor in question would be a
substantial abuse of the provisions of Chapter 7. 11 U.S.C.
§ 707(b). Bad faith is merely one element of substantial
abuse under § 707(b). See, e.g., Lamanna,
153 F.3d at 1 (rejecting the notion that the term substantial abuse refers only
to bad faith acts, although courts should consider bad faith in making a
substantial abuse determination). An additional difference between
§ 707(a) and § 707(b) is that courts may
not consider the debtor’s contributions to certain religious or
charitable organizations under § 707(b). On the other hand,
any party in interest may bring a motion under § 707(a) and
rather than dismissal for “substantial abuse,” §
707(a) permits dismissal for “cause.” 11 U.S.C.
§ 707(a). Section 707(a) does not prohibit consideration of
charitable donations. On Lloyd’s motion, the Court dismissed
Collins’ case as a bad faith filing under § 707(a)
based on the factors discussed below. The most important factor of the totality of
the circumstances test is whether the debtor has the present ability to pay his
debts if he chooses. Stewart, 175 F.3d at 810; Lamanna, 153 F.3d at 4. In
making this determination, it is proper to consider all the debtor’s
assets, including exempt assets. Kornfield, 164 F.3d at 784. “A
totality of circumstances inquiry is equitable in nature and the existence of
an asset, even if exempt from creditors, is relevant to the debtor’s
ability to pay his or her debts.” Id.
Clearly, Collins has the ability to pay the only debt remaining after his
reaffirmation of the Harris and Northern Trust debts, the $525,000 debt to
Lloyd’s. He could pay it out of his $2.3 million dollars in life
insurance and pension funds. That no court can require him to do so and that he
likely never will is beside the point. He can pay if he so chooses. Collins
also has the ability to pay out of future income if he so chooses. Courts
should consider the debtor’s future income as it relates to his debts
and living expenses in determining whether the debtor is abusing the bankruptcy
process. See, e.g., Stewart, 175 F.3d at 809
(comparing a debtor’s monthly earning potential to his debts and
living expenses and finding substantial abuse under § 707(b)
where the debtor could easily pay his debts out of future income). However,
Collins has clearly stated that he will stop working, and thus curtail his
income stream to exempt income, if denied bankruptcy relief. He says that he
does not want to work as an “indentured servant” to
Lloyd’s. The Court also considered whether Collins was
merely seeking to gain an advantage over Lloyd’s, his only true
creditor, by filing his bankruptcy petition. This is an important factor in a
totality of circumstances analysis. Lamanna,
153 F.3d at 4; In re Krohn, 886 F.2d 123, 126 (6th Cir.1989). Whether the
debtor has manipulated the bankruptcy process to frustrate one particular creditor
is a significant factor in the test under § 707(a). In re
Griffieth, 209 B.R. 823, 827 (Bankr.N.D.N.Y.1996).
That Collins has so manipulated the process is evident from the facts; because
[*655] he reaffirmed his other debts,
Lloyd’s is his only true creditor. Both the circumstances of the case
and Collins’ own statements make it manifestly evident that he filed
the bankruptcy petition solely and purposely seeking to gain an advantage over
Lloyd’s. Another factor is the absence of any attempt
to pay creditors. Id. Collins has either paid or agreed to
pay his other creditors. It was only Lloyd’s that he sought to
“get off his back.” Finally, the Court considered
Collins’ unwillingness to make lifestyle changes, such as a cutback in
vacations and gifts to his family. There is nothing inherently wrong with these
gifts and vacations; on the contrary, Collins’ affection for and
commitment to his family is both likable and admirable. However, Collins is a
debtor in bankruptcy, where a significant factor in a totality of the
circumstances analysis is whether the debtor is willing to make lifestyle
changes to pay his debts. Kornfield, 164 F.3d at 784; Krohn,
886 F.2d at 126; Griffieth, 209 B.R. at 827. Creditors
should not have to bear the burden of a debtor’s open-handedness,
especially to non-dependent members of his family. Collins, condemning himself
out of his own mouth, stated in open court that he filed the bankruptcy
petition so that he would not have to change his lifestyle, even temporarily,
to pay Lloyd’s. This Court ruled that it “would be an affront
to equity and good conscience to allow the debtor to manipulate the system as
he seeks to do here.” (April 12, 11:00 a.m. Transcript at 28:14-16)
(hereinafter “Tr. 3”). The proof was “so
overwhelming by the debtor’s own filings and testimony to demonstrate
his bad faith whether by subjective or objective tests.” (Tr. 3 at
29:16-19). Concluding that by filing for bankruptcy, Collins was merely firing
one more shot in his battle with Lloyd’s, the Court stated that if it
were to rule in Collins’ favor it “wouldn’t be able
to face the Chapter 13 debtors who seek to eke out a living with an additional
five dollars, or the Chapter 7 debtors who must give up everything in order to
continue living on a bare subsistence level.” (Tr. 3 at
29:24-25-30:3). The Court entered an order dismissing Collins’ case as
a bad faith filing, but retained jurisdiction to consider motions for sanctions
and trustee’s fees. At the request of Brisky and the Firm, the Court
agreed to bifurcate the liability issue from the amount and nature of
sanctions. Only after a determination of whether Collins, Brisky, or the Firm
should be sanctioned would the hearing proceed on the appropriate nature and
amounts. The Court has already entered orders authorizing payment of fees and
costs to Kirkland & Ellis, counsel for the Trustee, in the amount of
$7,735.44 for fees and costs, and to the Trustee in the amount of $10,046.89
for fees and costs. The Trustee was ordered to return the balance of funds in
the estate to Collins. Lloyd’s did not object to these payments.
Brisky has not submitted a fee application to the Court. DISCUSSION Lloyd’s moves for sanctions under 11
U.S.C. § 105(a) and under Federal Rule of Bankruptcy
Procedure 9011 based on Collins’ initial bad faith filing and
subsequent actions that compounded the litigation. It seeks as sanctions all
attorneys fees and costs incurred by it during the pendency of
Collins’ bankruptcy case, in the total amount of $133,107.09. It seeks
additional sanctions equal to the amounts the estate paid to the Trustee and
his counsel, plus those Collins has paid or will pay to his counsel. Under the
protection of the automatic stay imposed by 11 U.S.C. § 362,
Collins initiated his appeal of the Berkos decision without first paying the
judgment or posting a bond; Lloyd’s argues that the mere dismissal of
his case, without further sanctions, would therefore allow him to partially
achieve the objective of his bad faith filing. Although Collins has now posted
a $300,000 bond for the Berkos appeal, he proceeded for several months, [*656]
during the pendency of the bankruptcy, without posting any bond at all. A dismissal for bad faith filing does not per
se require a subsequent imposition of sanctions. See, e.g., In re Park Place
Assocs., 118 B.R. 613, 618 (Bankr.N.D.Ill.1990) (explaining
that standards for dismissal of a Chapter 11 petition are different than those
for imposition of sanctions under Rule 9011). However, a filing made for an
improper purpose, such as to harass a creditor, does require sanctions. Id.
at 616. In this particular case, the facts leading to the dismissal of
Collins’ case as a bad faith filing all support the findings that
Collins: (a) filed the petition for an improper purpose under the provisions of
Rule 9011 and (b) attempted to manipulate the bankruptcy process to thwart
Lloyd’s in violation of § 105(a). Although no party
effectively addresses this issue, an analysis of whether to impose sanctions
under § 105(a) is different than an analysis under Rule 9011.
See, e.g., In re Rimsat, Ltd., 212 F.3d 1039, 1048
(7th Cir.2000) (affirming the lower court’s decision to sanction under
both § 105(a) and Rule 9011, because Rule 9011 could reach
only the individual who signed the document in question); see also, Geraci
v. Bryson (In re Bryson), 131 F.3d 601, 603 (7th Cir.1997)
(explaining that a bankruptcy court’s authority to impose sanctions
under § 105(a) permits it to punish conduct that Rule 9011
cannot reach); In re Rainbow Magazine, 77 F.3d 278, 284-85 (9th Cir.1996)
(holding that bankruptcy courts have inherent power under
§ 105(a) to sanction bad faith or vexatious conduct that does
not fall within the purview of Rule 9011). Section 105(a) grants much broader
powers and can reach all parties involved, rather than only those who signed or
advocated pleadings. Rimsat, 212 F.3d at 1048.
Bankruptcy courts have both statutory and inherent powers to sanction under
§ 105(a). Id. “A sanctioning court should
ordinarily rely on available authority conferred by statutes and procedural
rules, rather than its inherent power, if the available sources of authority
would be adequate to serve the court’s purposes.” Id.
However, courts may resort to their inherent powers, rather than specific rules
and statutes, where broad authority is necessary to ensure that all culpable
parties receive an appropriate sanction. Id.
Having said this, the Court will nevertheless first discuss the applicability
of both the statutory and inherent powers to sanction granted in
§ 105(a). A review of Collins’ abuse of the
bankruptcy process under § 105(a) sheds light on the issue of
whether the petition was filed for an improper purpose under Rule 9011. Sanctions Under § 105(a) Section 105(a) of the Bankruptcy Code
provides: The court may issue any order, process, or judgment that is necessary
or appropriate to carry out the provisions of this title. No provision of this
title providing for the raising of an issue by a party in interest shall be
construed to preclude the court from, sua sponte, taking any action or making
any determination necessary or appropriate to enforce or implement court orders
or rules, or to prevent an abuse of process. 11 U.S.C. § 105(a).
“Section 105 grants broad powers to implement the provisions of Title
11 and to prevent an abuse of bankruptcy process.” In re Volpert,
110 F.3d 494, 500 (7th Cir.1997). The plain language of § 105
empowers bankruptcy courts to sanction conduct that abuses the judicial process
and vexatiously multiplies bankruptcy proceedings. Id.
at 501 (citing with approval and following Rainbow Magazine,
77 F.3d 278, in which the Ninth Circuit held that bankruptcy courts have
authority under § 105 to impose sanctions for the bad faith
filing of a bankruptcy petition). Section 105(a) confers both statutory and
inherent authority upon the bankruptcy courts. Rimsat,
212 F.3d at 1048. The Court may use its statutory [*657]
authority under § 105(a) to sanction Collins, Brisky, and the
Firm if it finds that they have abused the judicial process. When a bankruptcy filing is motivated by a
desire to delay a creditor from enforcing its rights in an ongoing dispute, the
filing is an abuse of process. Jones v. Bank of Santa Fe (In re Courtesy
Inns), 40 F.3d 1084, 1085, 1090 (10th Cir.1994). Section
105(a) empowers bankruptcy courts to punish attorneys who vexatiously multiply
the proceedings before them. Volpert, 110 F.3d at 500 citing Courtesy Inns, 40
F.3d at 1089. Sanctions are justified under § 105(a) where
the sanctioning court has clearly found that a litigant “intentionally
abused the judicial process in an unreasonable and vexatious manner.” Rimsat,
212 F.3d at 1047. A case filed for the purpose of delay is also a sanctionable
abuse of process. Hendrix v. Page, 986 F.2d 195, 201 (7th
Cir.1993). Bankruptcy relief is limited to the honest
but unfortunate debtor. Grogan v. Garner, 498 U.S. 279, 286-87, 111
S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). It is intended to give a fresh start in
life to “certain insolvent debtors,” Id.,
so they can “reorder their affairs, make peace with their creditors,
and enjoy ‘a new opportunity in life with a clear field for future
effort, unhampered by the pressure and discouragement of preexisting
debt.’ “ Id. quoting Local Loan
Co. v. Hunt, http://supreme.justia.com/us/292/234/case.html" target=_blank>292 U.S. 234, 244, 54
S.Ct. 695, 699, 78 L.Ed. 1230 (1934). It is not intended to allow the clever
and determined rich an opportunity to slip away from a single, disfavored
creditor. Collins and his attorneys admittedly filed
the Chapter 7 petition solely to thwart Lloyd’s. In the Joint
Pre-Trial Order, Collins’ proposed several findings of fact to this
effect, including: (42) [Collins] filed this
case in order to obtain relief from, and a discharge with respect to his
liability to Lloyds [sic]. (43) [Collins] also filed
this case in order to attempt to obtain finality with respect to his continuing
liability to Lloyds [sic] policyholders. [FN2] FN2. The Court found, and
Collins conceded, that none of these policyholders have made any claims against
Collins. The Court further found, and Collins conceded, that the only debt that
Lloyd’s is seeking to collect is the Berkos
Judgment. (44) [Collins] also filed
this case in order to protect his exempt assets and to obtain a fresh start
free of his involvement with Lloyds [sic]. (Joint Pretrial Order at p. 16). Even now that the Court has held that such
purposes were a manipulation of the bankruptcy system “purely and
admittedly for the purpose of frustrating Lloyd’s while honoring and
respecting his other debts,” (Tr. 3 at 29:6-9), Collins, Brisky and
the Firm continue to argue that Collins justifiably filed the petition to
“discharge Lloyd’s … claims against him at the cost
of receiving such relief, to wit, financial disclosure, cooperation with the
Trustee and surrender of his … non-exempt assets. Morever, as
[Collins] testified, he wanted to terminate his litigation with
Lloyd’s rather than continue it.” (Memorandum of
Debtor’s Counsel in Opposition to Lloyds’ [sic] Petition for
Award of Sanctions at p. 8-9). There is no possible conclusion to draw from
these arguments but that, having lost on the merits in almost every available
forum, Collins and his attorneys resorted to bankruptcy simply to bring the
ongoing litigation to a crashing halt. Because almost all of Collins’
millions of dollars are exempt assets, they knew that bankruptcy relief would
cost Collins comparatively little, $75,000, as opposed to payment of the $525,000
Berkos judgment. This is not just a litigation tactic, but an inequitable
attempt at litigation derailment. Collins’ bankruptcy filing was both
unreasonable and vexatious. Collins was neither insolvent nor in financial
distress. Collins did not file his Chapter 7 petition to discharge debts he
could not pay. He filed to stick it to [*658]
Lloyd’s. First, he is perfectly able to pay the $525,000 debt to
Lloyd’s and still have at least $1.8 million left in assets, not to
mention his handsome income. Secondly, and more importantly, even if
successful, the bankruptcy filing would not have made any changes in his
financial situation. Before the bankruptcy filing, Lloyd’s was unable
to reach Collins’ millions in exempt assets. During the pendency of
the case, Lloyd’s was unable to reach Collins’ millions in
exempt assets. Now that the case has been dismissed, Lloyd’s is unable
to reach Collins’ millions in exempt assets. Before the case was
filed, Collins had $75,000 in non-exempt assets that Lloyd’s could
reach. During the pendency of the case, the bankruptcy estate had possession of
that $75,000, which would have gone to pay Lloyd’s after the payment
of administrative expenses such as fees for the Trustee and his counsel. Now
that the case has been dismissed, the $75,000 has been returned to Collins,
less administrative expenses of about $18,000, and Lloyd’s can still
reach it. All that has really happened as a result of the bankruptcy filing is
that Collins now has only about $57,000 in non-exempt assets, instead of
$75,000. Never at any time, before, during, or after the filing, was
Lloyd’s going to be able to reach more than Collins’ few
exempt assets. Collins has acknowledged that he and his attorneys knew this to
be true, stating that “if this bankruptcy is dismissed, Lloyds [sic]
would be able, at best, to receive [Collins] non-exempt assets only, something
it could do in this case.” (Memorandum in Opposition to Lloyds’
[sic] Motion to Dismiss at p. 6). Collins filed the Chapter 7 petition because
after making a losing investment, and litigating over it on two continents for
several years, both as plaintiff and defendant, he wanted to take his marbles
and go home before the game was over. He didn’t want to play anymore
and he tried to use the bankruptcy system first to compound the proceedings and
then to call the game. He made a unilateral decision to settle with
Lloyd’s for $75,000 and attempted to cram it down Lloyd’s
throat using the bankruptcy system. Further, as discussed in the following
section on Rule 9011, Collins, Brisky, and the Firm proceeded with the
bankruptcy although they knew or should have known that the case was likely,
although not certain, to be dismissed as a bad faith filing. The Collins filing was clearly an abuse of
the bankruptcy process and the judicial system. It has clogged the dockets of
two federal courts and has caused Lloyd’s to expend substantial time
and effort to resist it. Collins tries to characterize this motion for
sanctions in the following ways: “Since he lost the case, let him also
be sanctioned for ever having brought it,” or “Since he
defied Lloyd’s, let him be destroyed.” (Memorandum in Support
of Debtor Patrick Collins in Opposition to Lloyd’s Petition for
Sanctions p. 1). It is true that Collins will be sanctioned for having brought
the case, but sanctions will not be imposed because he lost. They will be
imposed because he never should have brought the case in the first place. Nor
will sanctions be imposed to destroy him for defying Lloyd’s. It is
neither the policy nor the practice of this Court to destroy litigants for
properly opposing their adversaries. Sanctions will be imposed to punish
Collins and his attorneys for intentionally abusing the judicial process in an
unreasonable and vexatious manner. Standards for Measuring Sanctions Under
§ 105(a) Sanctions under § 105(a)
may be used to punish litigants and attorneys. Rimsat, 212 F.3d at 1048;
Volpert, 110 F.3d at 500. However, sanctions for abuse of process should be
narrowly tailored to the abuse. Support Systems Int’l, Inc. v. Mack,
45 F.3d 185, 186 (7th cir.1995). Section 105(a) grants statutory authority to
impose “necessary and appropriate”Œ sanctions for an abuse of
process. 11 U.S.C. § 105(a). Having determined that sanctions
for abuse of process under § 105(a) should be [*659]
imposed on Collins and his attorneys, the Court allows the parties the
opportunity to present arguments as to the sanctions necessary and appropriate
to punish and prevent an abuse of process, pursuant to the standards set forth
above. Sanctions Under Rule 9011 Federal Rule of Bankruptcy Procedure 9011
requires that almost every paper presented to the court be signed by an
attorney of record or pro se litigant. Fed. R. Bankr.P. 9011(a). It further
provides in pertinent part: (b) Representations to the court By presenting to
the court (whether by signing, filing, submitting, or later advocating) a
petition, pleading, written motion, or other paper, an attorney or
unrepresented party is certifying that to the best of the person’s
knowledge, information, and belief, formed after an inquiry reasonable under
the circumstances,— (1) it is not being
presented for any improper purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation; (2) the claims, defenses,
and other 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…. Fed. R. Bankr.P. 9011(b). Rule 9011(c)
authorizes the bankruptcy courts to impose sanctions for violations of Rule
9011(b): If, after notice and a reasonable opportunity
to respond, the court determines that subdivision (b) has been violated, the
court may, subject to the conditions stated below, impose an appropriate
sanction upon the attorneys, law firms, or parties that have violated
subdivision (b) or are responsible for the violation. Fed. R. Bankr.P. 9011(c). Sanctions shall be
limited to what is sufficient to deter the conduct complained of. Fed. R.
Bankr.P. 9011(c)(2). Sanctions may be nonmonetary or may include payment of
some or all of the reasonable attorneys fees incurred as a result of the
violation. Fed. R. Bankr.P. 9011(c)(2). Rule 9011 is “essentially
identical” to Federal Rule of Civil Procedure 11. Park Place, 118 B.R.
at 616. Rule 11 precedents may be applied to make decisions under Rule 9011. H.J.
Rowe, Inc. v. Spiegel, Inc. (In re Talon Holdings, Inc.),
Nos. 97 B 37535, 99 A 01815, 1999 WL 150337 at *3 (Bankr.N.D.Ill. March 19,
1999); Park Place, 118 B.R. at 616. Rule 11 was amended in 1993 and Rule 9011
was amended in 1997 to add a “safe harbor” clause allowing a
movant to withdraw an objectionable pleading. Rule 9011 was amended so that it
would conform to Rule 11. Fed. R. Bankr.P. 9011 advisory committee’s
note (1997). The amendments were procedural and not substantive, so
pre-amendment cases under either rule are still applicable today. Talon,
1999 WL 150337 at *3. Rule 9011 expressly excludes the filing of a
bankruptcy petition from the safe harbor provision. Fed. R. Bankr.P.
9011(c)(1)(A). The Rule excludes the initial filing because “[t]he
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.” Id. Whether the Provisions of Rule 9011 Apply to
Collins Although none of the parties has raised the
question, the first issue to be determined is whether Rule 9011 applies only to
Brisky and the Firm, or to Collins as well. Collins signed his bankruptcy
petition; however, Rule 9011(b) plainly states that by presenting it to the
court, “attorneys or unrepresented parties” certify that a
paper meets the requirements of Rule 9011. Fed. R. Bankr.P. 9011(b). [*660]
Collins is neither an attorney nor an unrepresented party. Before the 1993 amendments to Rule 11, the
Rule applied to represented parties. Business Guides, Inc. v. Chromatic
Communications Enterprises, Inc., 498 U.S. 533, 544-45, 111
S.Ct. 922, 929-30, 112 L.Ed.2d 1140 (1991). However, before the 1993
amendments, Rule 11 provided that the “signature of an attorney or
party constitutes a certificate …” that the paper conforms to
the Rule’s requirements. Fed.R.Civ.P. 11 (1993) (amended 1993). The
word “party” in Rule 11 has now been changed to the words
“unrepresented party.” Fed.R.Civ.P. 11(b). In Business
Guides, the Supreme Court held that the only way that a represented party who
signed a paper could avoid having to satisfy the certification requirement was
by reading the words “attorney or party” to mean
“attorney or unrepresented party.” 498 U.S. at 544-45, 111
S.Ct. at 929. Then, the signature of an unrepresented party would
“fall outside the scope of the Rule.” Id.
“Attorney or unrepresented party” is precisely what the Rule
now says. Fed.R.Civ.P. 11(b). Given the change in language following Business
Guides, it seems clear that under the present Rule 11, only attorneys or
unrepresented parties make a certification that the papers meet the
Rule’s requirements. Since the Rule requires a certification, it
is a false certification that violates it. The question then becomes whether a
represented party can be sanctioned if Rule 11(b) has been violated, even
though a represented party does not make a certification under Rule 11(b). Rule 11(c) provides that two groups may be
sanctioned if Rule 11(b) has been violated. Fed.R.Civ.P. 11(c). The first is
the attorneys, laws firms, or parties that have actually violated the Rule. Id.
The second group is those attorneys, law firms, or parties who are responsible
for the violation. Id. The sanction should be imposed upon
the persons-whether attorneys, law firms, or parties-who have violated the rule
or who may be determined to be responsible for the violation. The person
signing, filing, submitting, or advocating a document has a nondelegable
responsibility to the court, and in most situations is the person to be held
responsible for the violation. …. The revision permits the court to consider
whether other attorneys in the firm, co-counsel, other law firms, or the party
itself should be held accountable for their part in causing a violation. The revision permits the
court to consider whether other attorneys in the firm, co-counsel, other law
firms, or the party itself should be held accountable for their part in causing
a violation. When appropriate, the court can make an additional inquiry to
determine whether the sanction should be imposed on such persons, firms, or
parties either in addition to or, in unusual circumstances, instead of the
person actually making the presentation to the court.
Fed.R.Civ.P. 11 advisory
committee note (1993). Collins has not actually violated Rule 11(b), because
according to its plain language, he has made no certification. He was not the
person actually making the presentation to the court; Brisky was. Therefore,
Collins is not a member of the first group. However, the petition was filed on
his behalf and under his direction for the sole purpose of using the bankruptcy
system to remain a wealthy man while frustrating Lloyd’s. Rule 9011, unlike Rule 11, accords special
treatment to a bankruptcy petition because of the instant and substantial
advantage the filer gains and the instant and substantial disadvantage his
creditors suffer. Furthermore, “experience has shown that bankruptcy
proceedings are subject to a degree of manipulation and abuse not typical of
civil litigation.” Marsch v. Marsch (In re Marsch),
36 F.3d 825, 830 (9th Cir.1994). Under these circumstances, it is appropriate
to hold Collins accountable for his part in causing the violation. He is a
member of the second group-those responsible for causing a
violation.
[*661]
The application of Rule 9011 to Collins is
further supported by the Rule’s provision that monetary sanctions may
not be awarded against a represented party for a violation of the requirement
that the claims are warranted by existing law. Fed.R.Civ.P. 11(c)(2)(A). The limiting
precision which solely addresses this provision reflects that monetary
sanctions may be imposed on represented parties for violations of the other
sections of Rule 9011(b).
The Purpose and
Structure of Rules 11 and 9011
Rule 11 creates
duties to one’s adversary and to the legal system, just as tort law
creates duties to one’s client. The duty to one’s adversary
is to avoid needless legal costs and delay. The duty to the legal system (that
is, to litigants in other cases) is to avoid clogging the courts with paper
that wastes judicial time and thus defers the disposition of other cases or, by
leaving judges less time to resolve each case, increases the rate of error. Rule
11 allows judges to husband their scarce energy for the claims of litigants
with serious disputes needing resolution.
Mars Steel Corp. v.
Continental Bank, N.A., 880 F.2d 928, 932 (7th
Cir.1989).
Rule 11 has both a
subjective and an objective component. Harlyn Sales Corp. Profit Sharing
Plan v. Kemper Financial Services, Inc., 9 F.3d 1263, 1269 (7th
Cir.1993); Mars Steel, 880 F.2d at 931, Slaughter v.
Waubonsee Community College, No. 94 C 2525, 1995 WL
106420 at *3 (N.D.Ill. March 9, 1995). So does Rule 9011. In re Val W.
Poterek & Sons, Inc., 169 B.R. 896, 908
(Bankr.N.D.Ill.1994); Park Place, 118 B.R. at 617. The
objective inquiry asks whether the suit was filed after reasonable
investigation into the law and the facts. Szabo Food Service, Inc. v.
Canteen Corp., 823 F.2d 1073, 1083 (7th Cir.1987). The
subjective inquiry is into why the petitioner pursued the litigation. Id.
The objective component is equivalent to the tort of abuse of process (filing
an objectively frivolous suit). Id. The subjective component
is akin to the tort of malicious prosecution (filing a colorable suit to
harass, delay, or cause expense to the opponent). Kapco Mfg. Co., Inc. v. C
& O Enter., Inc., 886 F.2d 1485, 1491 (7th Cir.1989); Szabo,
823 F.2d at 1083; In re TCI Ltd., 769 F.2d 441, 445 (7th
Cir.1985). The objective inquiry asks whether the requirement of Rule 11(b)(2),
that the legal contentions are supported by law, has been satisfied. The
subjective inquiry asks whether the requirement of Rule 11(b)(1), that the
paper has not been presented for an improper purpose, has been met. Failure to
satisfy the requirements of either test may result in sanctions. Szabo,
823 F.2d at 1083; see also Beeman v. Fiester,
852 F.2d 206, 209 (7th Cir.1988) (explaining that if any one of Rule 11(b)’s
subsections has been violated, Rule 11 sanctions may be imposed).
Brisky
and the Firm claim that only an objective test is proper and cite In re
Rainbow Magazine, Inc., 136 B.R. 545 (9th Cir. BAP 1992) appeal
after remand 77 F.3d 278 (9th Cir.1996), a Ninth Circuit
Bankruptcy Appellate Panel case that the Ninth Circuit Bankruptcy Appellate
Panel itself has since stated is “no longer good law.” Franchise
Tax Board v. Lapin (In re Lapin), 226 B.R. 637, 641 (9th
Cir. BAP 1998). They do not cite any Seventh Circuit authority in support of
their claim.
There are a few Seventh
Circuit cases that place an “objective” label on the test to
determine whether a paper was interposed for an improper purpose. Pacific
Dunlop Holdings, Inc. v. Barosh, 22 F.3d 113, 118 (7th
Cir.1994); Deere & Co. v. Deutsche Lufthansa Aktiengesellschaft,
855 F.2d 385, 393 (7th Cir.1988). However, whether the test bears the
“subjective” label affixed in Mars Steel or
the “objective” label of Pacific Dunlop,
the inquiry is into the motivations behind the filing. Pacific Dunlop
briefly states that “[w]e determine whether a party’s conduct
was imposed for an improper purpose by an [*662]
objective standard,” 22 F.3d at 118, and cites to Deere,
855 F.2d at 393. In Deere, the court said that it
must “focus on objectively ascertainable circumstances that support an
inference that a filing harassed the defendant or caused unnecessary
delay.” Deere, 855 F.2d at 393 quoting National
Ass’n of Gov’t Employees, Inc. v. National Fed’n of
Federal Employees, 844 F.2d 216, 224 (5th Cir.1988). The Deere
court relied on Beeman v. Fiester, 852 F.2d 206, 209-10
(7th Cir.1988), abrogated by Mars Steel, 880 F.2d at 928.
In Beeman, the court wrote that an objective test for
improper purpose “necessarily requires an inquiry into the
party’s reasons for filing the paper” and places an emphasis
on “the party’s motives for filing the paper.” 852
F.2d at 209. The Beeman court further explained that the
subjective test becomes particularly important when the suit is objectively
colorable. Id. at 209 n. 1. Thus, no matter which label
attaches to the test, “subjective” or
“objective,” the test of whether a paper was interposed for
an improper purpose focuses on the reasons or motives for the filing. For
purposes of discussion, the Court will use the “subjective” label.
“For sanction
purposes the focus is on what the party intended and what that party knew or
should have known on the day the paper was filed.” Park Place,
118 B.R. at 617. Applying the objective test, the Court must consider whether
Collins or Brisky and the Firm made an inquiry, reasonable under the
circumstances, into both the facts of the case and the law affecting them
before filing the petition. Mars Steel, 880 F.2d at 932; Park
Place, 118 B.R. at 617. Applying the subjective test, the Court
must determine what motivated the filing. Mars Steel,
880 F.2d at 932; Park Place, 118 B.R. at 617. It must
examine the “subjective ‘belief’ and
‘purpose,’ ” Harlyn,9 F.3d at 1269,
of the attorney signing the pleading and consider whether the attorney who
signed the pleading “subjectively believed that what is stated in that
pleading ‘is warranted by existing law or a good faith argument for
the extension, modification or reversal of existing law and that it is not
interposed from any improper purpose…á’ ” Id.
Alternatively, or additionally, under the objective test for improper purpose
of Pacific Dunlop, the Court must look at objectively
ascertainable circumstances that support an inference that Collins’
actions harassed Lloyd’s or caused unnecessary delay.
The Subjective Test:
Improper Purpose Under Rule 9011(b)(1)
On the other hand, the
provisions of the automatic stay exist for, and were expressly created for, all
those who file bankruptcy. The provisions exist for the sole purpose of
delaying collection proceedings against those debtors. “It is
axiomatic that a primary purpose of the automatic stay is to give the debtor
some ‘breathing room.’ ” Park Place,
118 B.R. at 617. Therefore, the mere fact that Collins achieved the protection
of the automatic stay does not mean that he filed for an improper
purpose.
However, Collins did not
merely invoke the shield of the automatic stay; he converted it to a sword for
the sole purpose of frustrating a single creditor whom he is able, but
unwilling to pay. Furthermore, he attempted to use the bankruptcy system,
including this Court, to delay judgment, avoid the supersedeas
bond, and ultimately to force Lloyd’s to accept the amount, consisting
of his relatively insignificant non-exempt assets less bankruptcy expenses,
that he, and he alone, had determined should end the years of litigation. He
attempted to use the bankruptcy system, backed by his threat to stop working if
he did not receive a discharge, to impose his unilaterally-decided settlement
amount on his objecting opponent. Such a purpose is improper under Rule 9011.
The
Third Circuit Court of Appeals has found that a Chapter 11 petition filed under
similar circumstances was filed for an improper purpose. The debtor and
creditor had been “bickering and squabbling for years in the state
courts.” Cinema Service Corp. v. Edbee Corp.,
774 F.2d 584, 586 (3d Cir.1985). The court found that the debtor’s
filing on the eve of a foreclosure sale “was precipitated, not by a
desire, or need for reorganization, but simply to stave off a
sheriff’s sale on Cinema’s state court judgment.” Id.;
see also, Wright v. Tackett, 39 F.3d 155, 158 (7th
Cir.1994) (affirming Rule 11 sanctions against a litigant who filed federal
pleadings in a bad faith attempt to delay and disrupt state court proceedings).
Commenting that the same considerations apply in a case under Chapter 7, the
court held that the petition was filed for an improper purpose because the
existing and threatened claims did not constitute an “actual,
substantial danger to the economic viability” of the debtor. Cinema
Service, 774 F.2d at 586.
[*664]
Collins and Lloyd’s have been bickering and squabbling for years in
courts around the world. Collins filed his petition on the eve of judgment in
the Berkos case, on Brisky’s advice,
precipitated, not by a need or desire for reorganization, but simply to stave
off entry and enforcement of the Berkos Judgment.
Lloyd’s existing and threatened claims did not constitute an actual,
substantial danger to Collins’ economic viability; he is able to pay
them, but does not want to. While there is probably nobody who would wish to
part with roughly 20% of his net worth to pay an entity he loathes, it does not
change the fact Collins still would be a man of substantial means if he paid
Lloyd’s the Berkos Judgment. The Court
finds that Collins and Brisky and the Firm filed the Chapter 7 petition, not to
obtain relief for an honest but unfortunate debtor, but as a cutthroat
litigation tactic intended to delay and frustrate Lloyd’s in the
course of litigation that both parties have pursued for years. Furthermore,
they attempted to use the bankruptcy system to bring an abrupt and favorable
end to the litigation after forming the belief that Collins was going to lose
on the merits. This is an improper purpose under Rule 9011.
Thus, under
the subjective test, Collins and Brisky and the Firm breached their duty to
Lloyd’s, to this Court, and to the District Court. The bankruptcy
filing caused needless expense and delay, not only in this Court, but in the
District Court. It clogged the District Court by delaying entry of judgment
against Collins together with the other Berkos defendants.
It clogged this Court with a docket that includes 137 entries, accumulated
between October 14, 1999 and June 13, 2000. The petition was meritless, as
evidenced by the Court’s findings of fact and conclusions of law in
dismissing it as a bad faith filing. Sanctions should thus be imposed on
Collins and Brisky and the Firm under Rule 9011 because their actions fail the
subjective test under Rule 9011.
The Collins filing also fails the
objective test for improper purpose set forth in Deere
and adopted by Harlyn. A focus on objectively ascertainable
circumstances supports an inference that the filing harassed Lloyd’s
and caused unnecessary delay. Lloyd’s was Collins’ only true
creditor. Collins and Lloyd’s had been at each other’s
throats for years. Collins expected an unfavorable decision in Berkos
and, on the advice of counsel, filed his bankruptcy petition two weeks before
judgment was entered. Collins immediately reaffirmed his two other debts while
attempting to discharge the entirety of his Lloyd’s debt. Collins had
nothing to reorganize; most of his assets are exempt and those that are
non-exempt would have been available to pay Lloyd’s outside of
bankruptcy. Collins is not in financial distress; he is a wealthy man. Collins
has made no effort to pay Lloyd’s; he has done everything in his power
not to pay Lloyd’s. He has threatened even to extinguish his
non-exempt income stream rather than see any of it go to Lloyd’s.
These, and all other facts considered in dismissing Collins’ case, are
objectively ascertainable and support not only an inference, but an inescapable
conclusion, that Collins’ scorched-earth filing harassed
Lloyd’s and caused unnecessary delay.
The Objective Test:
Warranted by Existing Law Under Rule 9011(b)(2)
An attorney or
party filing papers or advocating a cause must make a reasonable investigation
into the facts of the case and into the law as applied to them. Fed. R.
Bankr.P. 9011. The signature on the paper is a certification that the legal
contentions therein are warranted by existing law or a nonfrivolous argument
for a change in the law. Fed.R.Civ.P. 9011(b)(2).
The facts, as they
relate to Collins’ bankruptcy filing, are uncontested. Therefore,
whether Collins, Brisky, and the Firm made a reasonable inquiry into the facts
is not at issue here.
[*665] The troubling question is
whether Collins FN3 and Brisky and the Firm made a reasonable
inquiry into the state of existing law and believed that Collins’
bankruptcy was supported by it. If a position is not warranted by existing law
or a good faith argument for a change in the law, it is frivolous from an
objective point of view. Szabo, 823 F.2d at 1082. Did
Collins and Brisky and the Firm know, or should they have known, that the
petition of this liquidating debtor, who was timely paying his debts; whose net
worth exceeds $2.3 million, most of which is exempt from creditors; whose
annual income exceeds $200,000; whose monthly living expenses exceed $11,000;
who is unwilling to change his lifestyle to pay his debts; and who admittedly
sought to escape a single creditor whom he had the ability to pay, was
unsupported and unjustified under existing law? FN3. Although Rule 11
does not permit monetary sanctions against a represented party for violation of
this requirement, nonmonetary sanctions may be imposed against him. Not all unsuccessful arguments
are frivolous. For an argument to be considered frivolous, “it must be
clear under existing precedents that there is no chance of success and no
reasonable argument to extend, modify or reverse the law as it
stands.” Mareno v. Rowe, 910 F.2d 1043, 1047 (2d
Cir.1990). However, sanctions should not have the effect of chilling creativity
or stifling zealous advocacy. LaSalle Nat’l Bank of Chicago v.
County of DuPage, 10 F.3d 1333, 1338 (7th Cir.1993). Collins
has not argued that existing law should be changed; therefore the Court must
consider whether it was clear under existing law that Collins had no chance of
success.
Collins, Brisky, and the Firm argue that it was not clear at
all. In support of their argument, they state: (1) that as noted above, the
Seventh Circuit has never considered a dismissal under either § 707(b)
or § 707(a) and therefore has not adopted the totality of the
circumstances test; (2) that the cases holding that exempt assets should be
considered in determining ability to pay have all been decided under § 707(b);
and (3) that other Lloyd’s Names have successfully discharged their
debts in bankruptcy in this District.
The Court dismisses the
third contention out of hand. As Collins and Brisky and the Firm have
repeatedly urged in this case, the question of a debtor’s good faith
in filing must be decided on an ad hoc basis. Zick,
931 F.2d at 1129. Thus, whether other debtors, who also happened to be
Lloyd’s Names, received discharges is not relevant to this inquiry.
The circumstances of those discharges may have been entirely different from
those now before the Court. FN4. The Court takes
judicial notice of the fact that the circumstances of the cases to which Brisky
and the Firm refer are in fact different in at least one important respect:
Lloyd’s did not file motions to dismiss those cases. As to the first
contention, the Court concludes that Collins, Brisky, and the Firm should have
been virtually certain from existing case law that the Court would apply the
totality of the circumstances test. Although the Seventh Circuit has not
addressed the question, the totality of the circumstances test has been widely
adopted and is the law in many circuits. See Kornfield,
164 F.3d at 783 (referring to the totality of circumstances test as
“mainstream”). A litigant may not adopt the
“ostrich-like tactic of pretending that potentially dispositive
authority against [his] contention does not exist.” Szabo,
823 F.2d at 1081 quoting Hill v. Norfolk & Western Ry.,
814 F.2d 1192, 1198 (7th Cir.1987); see also, Marsch,
36 F.3d at 830 (determining that a petition was of dubious legal merit because
the debtor’s argument was flatly contradicted by the overwhelming
weight of authority in districts where the issue had been decided). When a litigant
relies on obscure, discredited cases without acknowledging [*666]
the force of existing law, the argument is frivolous on an objective standard. Szabo,
823 F.2d at 1082.
Collins did not acknowledge the force of existing law.
With only one exception, he failed to cite any of the cases on which the Court
relied in dismissing his case. Collins grudgingly discussed Zick
in his brief, but only in resistance to the reliance Lloyd’s placed on
it.
Collins, Brisky, and the Firm instead tried to persuade the Court to
follow the obscure, minority holdings of two bankruptcy courts that have
determined no good faith filing requirement exists under § 707(a).
In re Landes, 195 B.R. 855, 860-61 (Bankr.E.D.Pa.1996)
citing Sinkow v. Latimer (In re Latimer), 82 B.R. 354, 356
(holding that good faith is not a requirement of § 707(a) and
that “cause” in § 707(a) means violation of
a court order); see also, In re Etcheverry,
221 B.R. 524, 525 (Bankr.D.Colo.1998) (adopting the holding of Latimer
and Landes) aff’d242 B.R. 503
(D.Colo.1999). Not only are these cases obscure, but they have been largely
discredited. While Landes and Latimer
have not actually been overruled, the Court notes that the United States
District Court for the District of Eastern Pennsylvania, which sits in review
over the Landes and Latimer
court, has held that a good faith filing requirement does exist under § 707(a),
In re Marks, 174 B.R. 37, 40 (E.D.Pa.1994) and has
expressly rejected Latimer. Id. at 40 n. 3. In addition,
although the Tenth Circuit, of which the District of Colorado is a part, has
not applied the totality of circumstances test to a case under § 707(a),
it has held that the test is proper for a case under § 707(b).
Stewart, 175 F.3d at 810. Ostrich-like, Collins and
his counsel pretended that these cases did not exist; they failed to bring them
to the Court’s attention. Under these circumstances, it is appropriate
to conclude that they “either are trying to buffalo the court or have
not done their homework.” Szabo, 823 F.2d at
1082.
Relying on summaries provided in Landes, Collins,
Brisky, and the Firm additionally tried to persuade the Court to adopt what the
Landes court characterized as the “frustrate
the bankruptcy purpose” test. This test asks whether “the
debtor is in bankruptcy with an intent to receive the sort of relief that
Congress made available to petitioners under the chapter in question-subject,
of course, to any statutory limitations on the extent of that relief-and is
willing to responsibly carry out the duties that Congress imposes on debtors as
the cost of receiving such relief.” In re Khan,
172 B.R. 613, (Bankr.D.Minn.1994). Under this test, bad faith may be evidenced
by “vindictive motivation to use bankruptcy solely as a
‘scorched-earth’ tactic against a pressing creditor or
opponent in litigation.” Id. Filing a bankruptcy
petition to frustrate a state court decree and defeat one creditor’s
rights, while manipulating earnings to achieve these purposes satisfies the Khan
test. In re Huckfeldt,
39 F.3d 829, 832-33 (8th Cir.1994). The debtor under this test must still be an
“honest but unfortunate debtor” and not a manipulator. Id.
at 833. Thus, even under Khan’s narrow
standard, the Court would have dismissed Collins’ petition
“for cause.”
Collins’ second
contention is that the cases considering the debtor’s exempt assets in
determining good faith all arise under § 707(b) or under 11
U.S.C. § 1325. However, the “substantial
abuse” standard of § 707(b) is more stringent than
the “for cause” standard of § 707(a). The
debtor’s good faith is merely one element of a substantial abuse
analysis, while it may by itself constitute cause under § 707(a).
Furthermore, Collins resorted once again to ostrich-like tactics and failed to
discuss or even cite any of the § 707(b) or § 1325
cases.
This Court is well aware of its responsibility to carefully avoid
penalizing arguments for legal evolution. Had Collins discussed any of the law
unfavorable to his position; had he mentioned and refuted [*667]
any of the unfavorable material in the cases such as Khan
and Huckfeldt, to which he did cite; had he made any
attempt to distinguish § 707(a) from § 707(b),
it might have been possible to conclude that he was making a good faith
argument for change in or extension of the law. However, he did none of these
things, but left the Court and Lloyd’s to do all that research. Such
foisting of the burden onto the Court or one’s opponent is precisely
what Rules 11 and 9011 were created to prevent. Mars Steel,
880 F.2d at 932.
Standards for
Measuring Sanctions Under Rule 9011 “Rule 11 is not
a fee-shifting statute in the sense that the loser pays. It is a law imposing
sanctions if counsel files with improper motives or inadequate
investigation.” Id. Rule 9011(c)(1)(A)
limits the amount of sanctions to “the reasonable expenses and
attorney’s fees incurred in presenting or opposing the
motion,” Fed. R. Bankr.P 9011(c)(1)(A), but does not require that the
court impose sanctions up to the limit. The purpose of both Rule 11 and Rule
9011 is deterrence. A sanction under Rule 11 should be the least severe that is
adequate for deterrence. Divane v. Krull Electric Co., Inc.,
200 F.3d 1020, 1030 (7th Cir.1999).
CONCLUSION For the foregoing reasons, sanctions of a
nature and amount yet to be determined will be imposed on Collins, Brisky and
the Firm for violation of the provisions of § 105(a) and Rule
9011. |